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THE  PKINCIPLES 

OF  ‘ , 


POLITICAL  ECONOMY 


THE  PKINCIPLES 

I ' 

OF 

POLITICAL  ECONOMY 


BY 

HENRY  ^IDGWICK, 

AUTHOR  OF  “THE  METHODS  OF  ETHICS,” 


'Tis  the  day  of  the  chattel, 

Web  to  weave  and  corn  to  grind: 
Things  are  in  the  saddle. 

And  ride  mankind. 

EMsaeoN. 


THIRD  EDITION 


MACMILLAN  AND  CO.,  LIMITED 
ST  MARTIN'S  STREET,  LONDON 
1924 


COPYRIGHT 


First  Edition  1883 
Second  Edition  1887 
Third  Edition  1901 
Reprinted  1924 


PRINTED  IN  GREAT  BRITAIN 


5uO.. 

^54.gTA 
c . % 


PREFACE  TO  THE  FIRST  EDITION. 


The  character  and  scope  of  this  treatise  I have  en- 
deavoured to  explain  fully  in  the  introductory  chapter  ; 
it  remains  for  me  here  to  acknowledge  my  debts 
to  the  works  that  have  chiefly  aided  me  in  com- 
posing it.  After  J.  S.  Mill’s  book,  from  which  I first 
learned  political  economy,  and  on  which  the  present 
work  must  be  understood  to  be  primarily  founded,  I 
believe  that  I owe  most  to  Jevons’s  Theory  of  Political 
Economy,  the  leading  ideas  of  which  have  been  con- 
tinually in  my  thoughts.  1 am  also  considerably  in- 
debted both  to  Cairnes’s  Leading  Principles  of  Political 
Economy  and  to  the  Economics  of  Industry,  by  Mr  and 
Mrs  Alfred  Marshall,  together  with  some  papers  by 
Mr  Marshall  on  the  theory  of  Value  diagrammatically 
treated,  which  have  been  privately  printed  \ I have 
also  derived  valuable  suggestions  from  Mr  Hearn’s 
Plutology,  and  from  Mr  F.  A.  Walker’s  Wages ; also 
from  Mr  Macleod,  as  regards  the  theory  of  Money,  and 
to  some  extent  in  treating  of  Wealth  and  Capital — 

1 Mr  Marshall  also  lent  me  for  perusal,  several  years  ago,  some  MSS  on 
Foreign  Trade  which  have  not — so  far  as  I know — been  printed. 


VI 


PREFACE 


though  I do  not  agree  with  most  of  Mr  Macleod’s  views. 
I must  also  express  my  obligations  to  the  writer  of  an 
article  on  “Industrial  Monopolies”  in  the  Quarterly 
Review  of  October  1871. 

Among  foreign  writers,  I have  derived  most  assist- 
ance from  the  works  of  Professor  A.  Wagmer  and  the 
late  Professor  A.  Held  ; especially  from  the  former’s 
elaborate  systematic  treatise  on  the  subject.  I am  also 
indebted  to  Cournot’s  Principes  Mathematiques  de  la 
Theorie  des  Richesses,  and  to  Schaffle’s  Quintessenz  des 
Socialisnius  and  Bau  und  Leben  des  Socialen  Korpers. 

Finally,  I must  acknowledge  gratefully  the  aid 
that  many  friends  have  kindly  given  me,  by  supply- 
ing information  or  suggesting  corrections  requmed  for 
various  portions  of  the  work  while  it  was  in  progress ; 
among  whom  I must  particularly  mention  Mr  F.  W, 
Maitland,  of  Lincoln’s  Inn,  and  Mr  J.  N.  Keynes, 
of  Pembroke  College,  Cambridge.  To  the  latter  I 
am  especially  indebted  for  his  kindness  in  reading 
and  criticising  the  proof-sheets  of  the  greater  part 
of  the  book ; which  has  enabled  me  to  improve  it 
in  many  respects. 

H.  SlDGWICK. 


March  1883. 


PREFACE 


vii 


PEEFACE  TO  THE  SECOND  EDITION. 


In  revising  the  book  for  a second  Edition  I have 
carefully  considered  all  the  published  criticisms  of  it 
that  I have  seen,  and  also  the  criticisms  that  have  been 
kindly  sent  me  in  private  by  several  persons — among 
whom  I ought  especially  to  thank  Mr  F.  Y.  Edge- 
worth,  Mr  Carveth  Eead,  and  Mr  P.  H.  Wicksteed. 
I have  usually  modified,  and  sometimes  rewritten,  the 
passages  criticised  : but  I have  not  altered  my  views 
on  any  point  of  fundamental  importance.  I have  also 
endeavoured  to  shorten  and  simplify  several  parts  of 
my  exposition  which  appeared  to  me  needlessly  prolix 
or  complicated  ; and  have  thus  been  able  to  make  room 
for  a certain  amount  of  new  matter  without  materially 
adding  to  the  size  of  the  book.  Further,  I have  been 
aided  in  my  revision  by  some  of  the  books  on  Political 
Economy  which  have  appeared  since  my  first  Edition ; 
to  some  of  these  I have  had  occasion  to  refer  by  name 
in  notes  : of  those  to  which  I have  not  so  referred  the 
most  important  is  the  Handhuch  der  politischen  Oekono- 
mie,  edited  by  G.  Schonberg.  I must  also  thank 
Mr  Keynes  and  Professor  Fox  well  for  useful  sugges- 
tions which  they  have  made,  at  my  request,  on  certain 
sections  of  the  book  while  it  was  passing  through  the 
press. 

H.  SiDGWICK, 


August  1887. 


PREFACE 


viii 


PKEFACE  TO  THE  THIRD  EDITION. 

In  preparation  for  a new  Edition  of  this  work 
Professor  Sidgwick  had  made  notes  of  certain  modifi- 
cations that  appeared  to  him  to  be  desirable.  These 
modifications  have  now  been  introduced ; but  they 
are  not  numerous  or  of  fundamental  importance.  The 
further  changes  in  this  Edition  consist  mainly  in  the 
incorporation,  principally  in  Chapters  2 and  8 of  the 
Introduction,  of  portions  of  articles  contributed  by 
Professor  Sidgwick  to  Mr  Palgrave’s  Dictionary  of 
Political  Economy.  It  was  the  author’s  wish,  ex- 
pressed when  these  contributions  were  originally  sent 
to  Mr  Palgrave,  and  repeated  to  me  shortly  before 
his  death  when  he  asked  me  to  prepare  this  Edition 
for  the  press,  that  such  use  should  be  made  of  the 
articles  ; and  the  requisite  permission  has  been  readily 
given  by  Messrs  Macmillan  and  Co.,  who  are  the 
publishers  of  the  Dictionary,  as  well  as  by  the  editor. 

I desire  to  express  my  indebtedness  to  Mrs 
Sidgwick  for  the  aid  she  has  given  me  in  revising 
the  proof-sheets. 

J.  N.  KEYNEa 


November  1901. 


CONTENTS. 


INTRODUCTION. 

CHAPTER  I. 

THE  PRESENT  STATE  OF  ECONOMIC  CONTROVERSY  IN  ENGLAND 
AND  THE  SPECIAL  AIM  OF  THE  PRESENT  WORK. 

PAGES 

1.  During  the  last  fifty  years  Political  Economy  in  England 

has  risen  from  a state  of  controversy  on  fundamental 
principles  and  method  into  that  of  an  apparently  estab- 
lished science,  and  again  relapsed  into  a state  of  con- 
troversy. .........  1 — 7 

2.  The  special  aim  of  the  present  work  is  to  eliminate  need- 

less polemics  by  a guarded  restatement  of  traditional 
doctrines,  with  due  recognition  of  the  advances  made  in 
economic  theory  by  recent  writers.  ....  7 — 9 

Note  on  Ricardo  and  J.  S.  Mill.  .....  9 — 11 

CHAPTER  II. 

THE  SCOPE  OF  POLITICAL  ECONOMY. 

1.  Is  Political  Economy  a Science,  concerned  with  what  is, 

or  an  Art,  concerned  with  what  ought  to  be  done?  . . 12 — 13 

2.  Originally  it  was  conceived  as  an  art,  and  is  formally  so 

defined  by  Adam  Smith ; but  the  substance  of  the  latter’s 
doctrine  inevitably  rendered  his  exposition  mainly  that 
of  a science ; 14 — 19 

3.  but  not  entirely,  since  the  doctrine  of  laisser  faire,  cha- 

racteristic of  Adam  Smith  and  his  school,  belongs  to  art ; 19 — 24 

4.  and,  in  the  department  of  production,  the  line  between 

science  and  art  is  difficult  to  draw.  . . . . 24—26 

6.  It  is  argued  that  since  the  practical  branch  of  Political 
Economy  cannot  be  completely  separated  from  the 
general  Art  of  Government,  it  should  be  absorbed  in 
the  latter.  Confusion  will,  however,  more  easily  be 
avoided  if  we  continue  to  recognise  an  Art  of  Political 
Economy,  at  the  same  time  carefully  distinguishing  it 


from  the  Science 26 — 28 

6.  Moreover,  the  Science  of  Political  Economy  is  itself  only 
a partially  distinct  branch  of  the  general  Science  of 

Society 29 — 32 

8.  P.  E.  b 


X 


CONTENTS 


PAGES 

7.  In  this  treatise,  all  questions  as  to  proper  governmental 
interference  in  economic  matters  are  treated  separately 
(in  Book  III.)  as  questions  belonging  to  the  Art  of 
Political  Economy.  The  Science  of  Political  Economy 
forms  the  subject  of  Books  I.  and  II.  . . . . 32 — 34 

CHAPTER  III. 

THE  METHOD  OF  ECONOMIC  SCIENCE. 

1.  Controversies  as  to  the  proper  Method  of  Economics  are 

due  partly  to  a confusion  between  the  Science  and  the 
Art  of  Political  Economy,  and  partly  to  inadvertence  in 
applying  to  the  science  as  a whole  statements  that  are 
true  of  portions  of  it  only 35 — 37 

2.  The  ordinary  treatment  of  the  theory  of  production  is 

mainly  inductive  and  analytical.  .....  37 

3.  The  traditional  method  of  determining  the  laws  of  dis- 

tribution and  exchange  is  primarily  deductive  and 
hypothetical,  but  obviously  requires  for  application  to 


concrete  cases  the  aid  of  induction.  ....  38 — 41 

4.  Both  the  general  legitimacy  of  this  method  and  its  neces- 

sary limitations  may  be  briefly  shewn  by  considering  its 

chief  hypotheses.  ........  41 — 47 

5.  So  far  as  the  method  of  political  economy  is  inductive,  it 

must  also  be  historical 47 — 50 

6.  In  using  the  deductive  method,  quantitative  precision 

should  be  attained  as  far  as  possible ; but  the  limits  of 
attainable  precision  should  also  be  carefully  noted.  . 50 — 52 

7.  In  a certain  sense  political  economy  must  be  considered  a 

mathematical  science : but  this  does  not  necessarily 
imply  the  use  of  mathematical  symbols  or  diagrams.  . 52 


BOOK  I. 

PRODUCTION. 

CHAPTER  I. 

THE  THEORY  OF  PRODUCTION. 

1.  In  this  book,  industry  is  \iewed  primarily  as  a function 
of  the  human  community,  without  regard  to  the  terms 
on  which  its  members  co-operate.  .....  55—57 


CONTENTS 

2.  But  in  order  to  use  the  notion  of  wealth  with  quantitative 
precision,  we  need  a clear  view  of  the  measure  of  wealth, 
and  therefore  of  value.  ....... 

CHAPTER  II. 

THE  DEFINITION  AND  MEASURE  OF  VALUE. 

1.  Search  for  a definition  is  often  the  best  way  of  examining 

what  has  to  be  defined.  The  definition  often  cannot  be 
both  useful  for  scientific  purposes  and  in  strict  conform- 
ity with  usage.  ........ 

2.  In  making  the  notion  of  exchange- value  precise,  the  main 

difificulty  is  to  find  a measure  of  variations  of  value : 
since  labour  is  not  the  measure  we  I’equire,  at  any 
rate  in  measuring  amounts  of  wealth.  .... 

3.  The  best  attainable  measure  is  liable  to  inevitable  in- 

exactness, owing  to  changes  in  the  relative  quantity  and 
in  the  quality  of  the  commodities  that  make  up  the 
aggregate  of  wealth.  ....... 

4.  The  distinctions  between  “objective”  and  “subjective” 

value  in  use,  and  between  “real  value”  in  exchange  and 
the  estimated  value  which  determines  actual  price,  are 
instructive;  but  this  notion  of  “real  value”  is  difficult 
to  employ  with  precision.  ...... 

CHAPTER  III. 

WEALTH. 

1.  The  difficulties  of  measuring  Value  apply  also  to  the 

measurement  of  Wealth ; and  other  difficulties  arise 
from  the  varying  relations  of  purchased  and  unpur- 
chased utilities 

2.  we  cannot,  however,  take  Utility  as  a measure,  discarding 

value 

3.  especially  considering  the  variations  in  needs.  . 

4.  We  must  distinguish  producers’  wealth  from  consumers’ 

wealth,  being  primarily  concerned  with  the  latter,  in 
estimating  the  wealth  of  a community : and  “wealth” 
cannot  include  services  (though  “produce”  may),  . 

5.  or  culture  or  skill, — though  skill  may  be  a form  of 

investment  of  capital.  ....... 

6.  In  discussing  the  questions  whether  debts,  patents, 

copyrights,  goodwill,  &c.,  are  wealth,  we  should  distin- 
guish (1)  producers’  wealth  from  consumers’  wealth,  and 
(2)  wealth  of  individuals  from  social  wealth.  . 


li 

PAGES 

57—58 


59—63 

63—69 

69—74 

74—77 


78—81 

81—84 

84^85 

86—89 

89—91 

91—95 
b 2 


CONTENTS 


xii 


CHAPTER  IV. 

CAUSES  OF  VARIATIONS  IN  PRODUCTION. 

1.  Taking  produce  to  include  all  commodities  derived  from 

the  application  of  man’s  labour  to  his  material  environ- 
ment,   

2.  variations  in  amount  of  produce  may  be  referred  to  several 

different  causes ; . 

3.  partly,  to  differences  in  men’s  physical  circumstances ; 

4.  partly,  to  differences  in  the  quantity  and  quality  of  their 

labour.  .......... 

5.  These  latter,  again,  are  largely  due  to  variously  caused 

differences  in  the  strength  of  the  motives  to  labour. 

6.  Efficiency  of  labour  is  greatly  increased  by  co-operation, 

especially  by  division  of  employments  ; . 

7.  it  also  depends  much  on  the  terms  of  co-operation : it  is, 

for  example,  increased  by  piece-work  where  applicable, 
and  in  some  cases  by  profit-sharing ; . . . . 

8.  it  is  also  increased  by  invention,  the  development  of  which 

has  at  once  aided,  and  been  aided  by,  that  of  co-opera- 
tion; and  by  capital — largely  required  in  consequence 
of  invention.  ......... 


CHAPTER  V. 

CAPITAL. 

1.  Capital  has  to  be  differently  defined  from  the  point  of 

view  of  the  individual  and  that  of  the  community; 
individual’s  capital  is  wealth  employed  for  profit ; . 

2.  and,  therefore,  includes  (a)  finished  products  in  the  pos- 

session of  producers  and  traders,  and  (6)  land ; but 
from  the  social  point  of  view  we  must  distinguish 
between  capital  and  land,  ...... 

3.  restricting  capital  to  the  results  of  human  labour,  including, 

however,  immaterial  results,  such  as  business  connexion, 

4.  and  skill ; but  not  physical  strength,  so  far  as  this  results 

from  consumpition  that  is  not  merely  a means  to  future 
production 

5.  The  accumulated  stock  of  cajjital  consists  mainly  of  in- 

struments, not  food  of  labourers  ; 

6.  which,  in  the  labourers’  possession,  is  not  capital  in  the 

ordinary  sense,  though  in  a wider  sense  it  may  be 


PAGES 

96—99 

99—101 

101—105 

105—107 

107—112 

112—115 

115—122 

122—125 


126—129 

129— 130 

130— 133 

133—135 

135—137 


CONTENTS 


called  consumers’  capital ; as  may  aU  unconsumed  wealth, 
so  far  as  it  is  the  immediate  result  of  labour  employed 
for  future  utility,  and  more  productive  of  utility  in  con- 
sequence of  the  postponement  of  consumption. 

7.  Producers’  capital — the  need  of  which  has  grown  steadily 
with  the  progress  of  industry — is  now  largely  owned  by 
persons  other  than  those  who  manage  it.  ... 

CHAPTER  VI. 

LAWS  OF  PRODUCTION. 

1.  By  Laws  of  Production  are  here  meant  quantitative  state- 

ments as  to  the  operation  of  different  causes  of  greater 
or  less  production 

2.  They  cannot  generally  be  laid  down  with  any  exactness.  . 

3.  Malthus’s  law  of  population  and  the  law  of  diminishing 

returns  from  land  are  valid,  when  duly  qualified,  as 
abstract  statements  of  tendencies ; also  the  concrete 
statement  that  in  old  countries  population  is  limited  by 
the  difficulty  of  procuring  subsistence ; but  the  limit  is 
not  rigid,  and  the  “standard  of  comfort”  that  partly 
determines  it  is  variable 

4.  The  law  of  increase  of  individuals’  capital  is  not  definitely 

ascertainable ; ........ 

5.  still  less  the  law  of  increase  of  social  capital. 

BOOK  II. 

DISTRIBUTION  AND  EXCHANGE. 

CHAPTER  I. 

INTRODUCTION. 

1.  The  fundamental  question  of  Distribution  is  how  produce 

tends  to  be  competitively  shared  among  the  different 
classes  who  co-operate — through  exchange — in  pro- 
duction  

2.  The  theory  of  distribution,  thus  conceived,  has  close 

affinity  to  the  theory  of  the  exchange-value  of  material 
products ; and  it  is  convenient  to  take  the  latter  first.  . 


xiii 

PAGES 

137—140 

140—141 

142— 143 

143— 147 


147—168 

158—164 

165—167 


171-^175 

175—178 


XIV 


CONTENTS 


CHAPTER  II. 

THEORY  OF  EXCHANGE  VALUE  OF  MATERIAL  COMMODITIES. 

PAGES 

1.  The  deductive  theory  of  value  depends  on  certain  assump- 

tions, which  require  to  be  carefully  stated, — mainly  on 
the  assumptions  of  “commercial”  and  “industrial”  com- 
petition  179—182 

2.  Mill’s  exposition  of  the  theory  is  in  the  main  sound,  but 

some  of  the  cardinal  terms — especially  “increase  of 
demand” — involve  ambiguities  that  need  to  be  re- 
moved.   182 — 188 

3.  “Equation  of  supply  and  demand”  is  formally  inadequate 

to  determine  price,  if  both  supply  and  demand  vary 

with  price 188 — 189 

4.  This  is  exemplified  by  the  indefinite  number  of  values 

possible  in  the  case  of  a monopolised  article;  . . . 189 — 190 

5.  compared  with  that  of  a “simply  scarce”  article.  . . 190 — 192 

6.  In  investigating  the  market- value  of  commodities  produced 

under  ordinary  conditions,  we  have  to  inquire  how 
supply  tends  to  be  affected  by  prospects  of  loss  and  gain 
in  holding  back ; ........  192 — 194 

7.  and  to  note  the  diverse  eflects  of  speculation.  . . 194 — 196 

8.  Cost  of  production — estimated,  as  it  must  be,  in  terms 

of  remuneration,  not  soicrifice — cannot  be  assumed  to  be 
independent  of  demand.  .......  196 — 202 

9.  Hence  the  Ricardian  doctrine  of  value  needs  important 

qualification.  202—205 

10.  The  determination  of  the  values  of  products  industrially 

connected  is  more  complex : 205 — 207 

11.  also  that  of  durable  products,  partly  sent  back  into  the 

market  by  consumers.  .......  207 — 208 

CHAPTER  III. 

THEORY  OF  INTERNATIONAL  VALUES. 

1.  There  are  various  causes  of  economic  gain  through  trade 

between  distant  places.  .......  209 — 212 

2.  The  peculiarity  of  the  theoretical  determination  of  the 

values  of  the  products  of  such  trade  depends  primarily 
not  on  the  imperfect  mobility  of  labour,  but  on  the 
cost  of  carriage 212 — 216 

3.  The  combined  laws  of  demand  of  the  diflerent  wares 

exchanged  tend  to  determine  how  much  of  the  double 


CONTENTS 


XV 


cost  of  carriage  is  to  be  added  to  the  “real  price”  of 
each  when  sold.  ........ 

4.  The  fluctuations  of  the  Foreign  Exchanges  may  be  used 

to  illustrate  this  theory,  but  some  precautions  are 
necessary.  ......... 

5.  The  term  “international”  may  be  objected  to  in  this 

connexion,  but  is  defensible.  ...... 

CHAPTER  IV. 

DEFINITION  OF  MONEY. 

1.  The  denotation  of  the  term  money  is  obscure  and  fluctua- 

ting ; but,  as  commonly  used  in  discussions  about  the 
money-market,  it  certainly  includes  bankers’  liabilities : 

2.  though  this  fact  has  not  received  adequate  recognition. 

3.  This  denotation  seems  on  the  whole  the  most  convenient. . 

CHAPTER  V. 

THE  VALUE  OF  MONEY. 

1.  The  value  of  metallic  money,  freely  coined,  may  be  re- 

garded as  depending  on  the  value  of  the  metal. 

2.  The  value  of  gold  is  slowly  and  irregularly  aflected  by  in- 

dustrial competition ; if  we  suppose  t|ie  quantity  given, 
variations  in  the  value  of  a gold  standard  will  be 
determined  by  variations  in  the  monetary  work  of  gold 
coin,  together  with  the  demand  for  gold  in  the  arts. 

3.  They  will,  therefore,  be  partly  due  to  changes,  difficult  to 

measure,  in  commodities  in  general.  .... 

4.  Bankers’  obligations  have  the  same  actual  value  as  the  coin 

they  represent ; though,  of  course,  a less  value  than  coin 
would  have  if  they  were  not  used ; and  a more  variable 
value.  This  must  be  distinguished  from  the  value  of 
money — i.e.,  of  the  use  of  money — in  the  money-market ; 
and  this  latter  again  is  not  to  be  identified  with  the  rate 
of  interest  on  capital  generally.  ..... 

5.  There  are,  however,  certain  connexions  between  the  pur- 

chasing power  of  money  and  the  rate  of  discount  in  the 
money-market  which  explain  the  common  confusion. 

6.  A double  standard  with  a fixed  ratio  will  be  stable  against 

minor  variations  of  suppl3',  the  fixed  ratio  causing  an 
adjustment  of  demand  to  supply.  ..... 

7.  The  value  of  inconvertible  currency  is  detei’mined  by  the 

relation  of  supply  to  demand. 


PAGES 

216—219 

219—222 

222—223 

224—229 

229—232. 

232—237 

238—242 

242—246 

246—248 

249—253 

253—265 

255—258 

258—260 


XVI 


CONTENTS 


CHAPTER  VI. 

INTERKST. 

1.  By  “ interest,”  in  the  theory  of  distribution,  is  meant  the 

share  of  produce  obtained  by  the  owner  of  capital  as  such. 

2.  By  “rate  of  interest”  is  meant  the  commonly  expected 

average  yield  of  newly  invested  capital ; which,  with 
certain  qualifications,  may  be  taken  as  approximately 
uniform  in  a modern  community  at  any  given  time. 

3.  It  depends  on  conditions  of  demand  and  supply  combined ; 

and,  so  far  as  demand  goes,  in  a modern  industrial  society, 
it  depends  mainly  on  industrial  demand. 

4.  It  tends  to  correspond  to  the  average  additional  produce- 

expected  to  be  obtained  by  the  employment  of  the  last 
increment  of  floating  capital,  minus  “employer’s  fee”; 
and  it  therefore  varies  with  variations  in  recognised 
opportunities  of  profitably  using  capital  to  aid  labour.  . 

5.  The  reaction  of  changes  in  the  rate  of  interest  on  the 

saving  that  supplies  capital  has  an  important,  but  not 
definitely  measurable,  tendency  to  keep  the  rate 
stable.  .......... 

6.  The  yield  of  most— but  not  of  all — old  investments  tends 

to  decrea.se.  ......... 


CHAPTER  VII. 

RENT. 

1.  Ricardo’s  view  of  agricultural  rent,  as  the  price  paid  for 

the  “ original  powers  ” of  the  soil,  and  his  account  of  the 
origin  and  history  of  rent,  are  unacceptable ; 

2.  and  his  formula  for  the  competitive  determination  of  rent 

is  acceptable  only  with  certain  important  qualifications. 
9.  Difficulties  arise  in  framing  rent-contracts  from  possibilities 
of  the  land  being  improved  or  deteriorated  during  a given 
tenancy  ; similarly,  in  the  case  of  mines,  from  deteriora- 
tion. .......... 

4.  Ricardo’s  conception  is  really  most  applicable  to  building 
land  in  towns.  There  are  various  other  extra  profits 
more  or  less  analogous  to  rent.  ..... 

CHAPTER  VIII. 

THE  REMUNERATION  OF  LABOUR. 

1.  Competition  does  not  tend  to  give  the  labourer  the  real 
wages  required  to  make  his  labour  most  efficient.  . 


PAGES 

261—265 

265—270 

270—273 

273—278 

278—281 

282—283 


284—289 

289—293 

293—296 

296—298 

299—302 


CONTENTS 


xvii 

PAGES 

2.  Nor  can  the  “ Wages-Fund  Theory,”  which  regards  general 
wages  as  determined  by  the  “ratio  of  capital  to  popu- 


lation,” be  accepted.  .......  302 — 306 

3.  Wages  should  not  be  regarded  as  paid  out  of  capital.  . 306 — 309 


4.  The  remuneration  of  labour — including  the  labour  of 

employers — may  be  regarded  as  the  share  of  produce 
that  remains  after  paying  for  the  use  of  capital  and 
land ; and  thus,  supposing  the  quantity  and  quality  of 
labour  to  be  given  independently  of  its  remuneration, 
the  latter  would  depend  partly  on  the  efficiency  of 
labour,  partly  on  the  price  paid  for  the  use  of  “ producers’ 
wealth.”  ..........  309 — 313 

5.  The  reaction  of  the  remuneration  of  labour  on  the  supply 

of  labourers  has,  however,  a certain  tendency  to  counter- 
act changes  in  this  remuneration,  though  to  a very  vary- 
ing extent  as  circumstances  vary.  .....  313 — 318 

CHAPTER  IX. 

PARTICDLAR  WAGES  AND  PROFITS. 

1.  The  proposition  that  industrial  competition  tends  to 

equalise  the  remunerations  of  average  labourers  requires 
important  limitations.  ....... 

2.  The  inequalities  in  the  wages  of  different  classes  are 

partly  compensation  for  differences  of  sacrifice  entailed 
by  their  work,  or  by  the  training  required  for  it,  partly 
due  to  scarcities  of  persons  able  or  willing  to  afford  the 
outlay  required  for  superior  qualities  of  labour,  partly  to 
scarcities  of  natural  gifts.  ...... 

3.  The  inequalities  of  the  average  earnings  of  employe:^  of 

different  amounts  of  capital  are  to  be  referred  chiefly  to 
these  two  kinds  of  scarcity  combined.  .... 

CHAPTER  X. 

MONOPOLY  AND  COMBINATION. 

1.  Monopoly  resulting  from  combination  is  a normal  ele- 

ment of  the  industrial  society  with  which  our  theory 
deals.  .......... 

2.  We  have  to  distinguish  various  modes  and  degrees  of 

monopoly — extending  the  term  to  include  “ buyers’  ” 
monopoly ; 


338—340 

340—345 


319—323 

323—330 

330—337 


CONTENTS 


xviii 

PAGES 

3.  and  to  note  special  characteristics  of  monopoly  resulting 

from  combination — open  or  tacit — and  different  methods 
of  attaining  the  end  in  view.  ......  345 — 349 

4.  Under  certain  conditions,  bodies  of  hired  labourers  may 

increase  their  earnings  by  combination,  without  counter- 
balancing loss  to  themselves  or  to  other  hired  labourers.  349 — 354 

5.  A normal  rate  of  exchange  between  opposing  combinations 

of  buyers  and  sellers  cannot  be  ascertained  by  the 
methods  of  economic  science. 354 — .355 

CHAPTER  XL 

TRANSIENT  AND  LOCAL  VARIATIONS  IN  DISTRIBUTION. 


1.  After  a summary  of  the  five  preceding  chapters,  in  which 

we  have  discussed  the  determination  of  normal  rates  of 
remuneration  for  industrial  services,  ....  356 — 360 

2.  we  notice  that  these  normal  rates  are  exposed  to  continual 

fluctuations,  especially  the  profits  of  business,  . . 360 — 362 

3.  and  proceed  to  analyse  the  causes  of  these,  as  due  to  moral 

and  intellectual  shortcomings,  to  accidents,  to  inventions 

and  other  improvements ;......  362—367 

4.  to  miscalcidations  of  demand  causing  (so-called)  “over- 

production”; .........  367 — 370 

5.  to  changes  in  the  rate  of  interest,  consequent  on  “over- 

production” or  otherwise  caused,  and  changes  in  the 
purchasing  power  of  money.  ......  370 — 372 

6.  This  leads  us  to  notice  local  variations  in  the  prices  of 

products,  due  to  physical  and  historical  causes  com- 
bined 373 — 375 

7.  and  consequent  inequalities  in  the  returns  to  labour  and 

capital,  kept  up  by  obstacles  to  migration  and  frequent 
industrial  changes.  . . . . . * . . . 375 — 379 

8.  Any  forecast  of  future  economic  changes  must  necessarily 

be  vague  and  conjectural,  except  so  far  as  it  is  avowedly 
hypothetical.  .........  379 — 385 


CHAPTER  XII. 

CUSTOM. 

1.  Distinguishing  Habit=the  tendency  to  do  as  one  has  done 
before,  from  Custom  = the  tendency  to  do  as  others  do, 
we  observe  that  the  economic  effects  of  habit  are 


various;  ..........  386 — 388 

2.  as  also  of  custom ;........  388 — 391 


CON  ENTS 


XIX 


PAGES 

3.  and  that  only  a part  of  these  etieots  is  excluded  by  the 
assumptions  of  the  competitive  system — namely,  (1)  the 
mere  blind  tendency  to  follow  use  and  wont,  and 
(2)  custom  as  morally  obligatory.  ....  391 — 392 

BOOK  III. 

THE  ART  OF  POLITICAL  ECONOMY. 

CHAPTER  I. 

The  Art  of  Political  Economy,  as  here  treated,  consists 
mainly  of  the  theory  of  what  ought  to  be  done  by  govern- 
ment to  improve  production  and  distribution,  and  to 
provide  for  governmental  expenditure 395 — 398 

CHAPTER  II. 

THE  SYSTEM  OF  NATURAL  LIBERTY  CONSIDERED  IN  RELATION  TO 


PRODUCTION. 

1.  The  general  argument  in  favour  of  leaving  industry  alone 

has  much  force,  but  needs  important  qualifications  and 
exceptions,  .........  399 — 402 

2.  even  in  the  most  abstract  theoretical  treatment,  owing  to 

divergence  between  utility  to  the  individual  and  utility 
to  society ; illustrated  generally  in  reference  to  bequest 
and  contract ; 402 — 406 

3.  exemplified  further  by  special  cases,  in  which  the  utility 

of  socially  useful  services  cannot  be  adequately  appro- 
priated by  the  persons  who  might  render  them ; . . 406 — 408 

4.  also  where  the  gain  of  a change  is  largely  counterbalanced 

by  loss ; and  in  the  case  of  monopoly,  especially  mono- 
poly resulting  from  combination 408 — 409 

5.  Sometimes,  however,  governmental  intervention  is  needed 

to  secure  such  combined  action  or  abstinence  as  is 
socially  advantageous.  .......  409 — 410 

6.  Note  must  also  be  taken  of  the  imperfectly  employed 

labour  that  competition  normally  involves,  and  the 

labour  spent  in  attracting  business.  ....  410 — 412 

7.  The  case  of  utilities  distant  in  time  has  also  to  be  con- 

sidered.   412 — 413 


XX 


CONTENTS 


PAGES 

8.  Hence  complete  laisser  faire  is  not  to  be  taken  as  a political 

ideal:  the  problem  for  the  statesman  is  to  balance  its 
disadvantages  against  the  disadvantages  of  extending 
the  sphere  of  government 413 — 416 

9.  Our  reasoning  so  far  has  left  unassailed  the  assumption 

that  the  individual  is  a better  judge  than  government 
of  his  economic  interests  : but  this  assumption  is  not 
completely  true,  nor  even  tending  to  become  so.  . . 416 — 418 

CHAPTER  HI. 

THE  RELATIONS  OF  GOVERNMENT  TO  INDUSTRY. 


1.  The  strictly  economic  interferences  of  government  are  to 

be  distinguished  from  its  interferences  with  industry  in 

the  exercise  of  its  necessary  functions.  ....  419 — 421 

2.  Such  interferences  are  of  various  kinds  and  degrees  of 

intensity,  .........  421 — 422 

3.  and  may  take  place  for  national  defence,  ....  422—423 

4.  for  the  protection  of  the  life,  health,  or  reputation  of  in- 

dividual citizens,  adults  or  children,  ....  423 — 427 

5.  or  for  protection  against  theft  or  fraud.  It  is  to  be 

observed,  further,  that  governments  have  importantly 
restricted  their  enforcement  of  contracts — e.g.,  by  bank- 
ruptcy laws — and,  under  the  guise  of  judicial  interpre- 


tation, have  practically  determined  the  conditions  of 


ordinary  engagements.  .......  427 — 432 

6.  Again,  many  important  questions  as  to  the  limits  of  the 
right  of  property  have  to  be  determined  by  government ; 
e.g.,  in  the  case  of  land,  patents,  copyrights,  inherit- 
ance.   432 — 436 


CHAFIER  IV. 

IMPORTANT  CASES  OF  GOVERNMENTAL  INTERFERENCE  TO  PROMOTE 
PRODUCTION. 

1.  Governments  (central  or  local)  have  interfered  specially  in 

businesses  concerned  with  transfer  ; partly  from  their 
tendency  to  become  mono{)olies,  partly  from  the  import- 
ance of  their  indirect  utilities  437 — 439 

2.  as  in  the  case  of  ordinary  roads, 439 — 440 

3.  railways  and  canals,  ........  440 — 444 

4.  and  the  post-office.  On  somewhat  similar  groimds  they 

have  intervened  in  the  provision  for  gas  and  water. 


444—  445 


CONTENTS 


XXI 


5.  Coining  is  obviously  adapted  for  governmental  manage- 

ment, on  various  grounds ; but  there  seems  no  reason 
why  it  should  not  pay  its  expenses.  .... 

6.  A bimetallic  currency  may  be  maintained  under  certain 

conditions  and  has  certain  advantages.  .... 

7.  The  establishment  of  a tabular  standard  would  much 

reduce  fluctuations  in  the  value  of  deferred  payments; 
but  it  would  be  a matter  of  difflculty.  .... 

8.  The  issue  of  convertible  notes  should  be  at  least  regulated, 

and  there  are  important  advantages  in  its  being  under- 
taken, by  government.  ....... 

9.  This  renders  it  desirable  that  government  should  form  a 

special  connexion  with  a bank ; but  not  that  it  should 
undertake  ordinary  banking  business — though  certain 
kinds  of  lending  seem  suited  to  government.  . 

10.  There  are  certain  other  departments  in  which  govern- 

ments have  intervened  partly  with  a view  to  production  : 
thus,  in  providing  for  education  and  culture  they  have 
partly  aimed  at  making  labour  more  efficient. 

11.  They  have  partly  on  similar  grounds  assisted  emigration  ; 

12.  and  arranged  the  sale  of  unoccupied  lands  on  other  than 

strictly  commercial  principles. 

13.  Even  in  fully  occupied  countries,  there  are  reasons  for 

keeping  certain  portions  of  land  under  governmental 
management,  as  forests ; for  restricting  private  property 
in  mines ; ......... 

14.  and  perhaps — though  this  is  more  doubtful — for  inter- 

ference with  the  tenure  of  agricultural  land,  in  order 
to  promote  production.  ....... 

Note  on  compulsory  purchases  of  land.  .... 

CHAPTER  V. 

FREE  TRADE  AND  PROTECTION. 

1.  Temporary  Protection,  though  not  practically  to  be  recom- 

mended, is  in  certain  circumstances  defensible  in  ab- 
stract economic  theory : . 

2.  even  from  a cosmopolitan  point  of  view, — especially  to 

foster  a new  industry ;....... 

3.  and  still  more  from  a purely  national  point  of  view,  in 

spite  of  important  drawbacks.  ..... 

4.  And  Free  Trade  may  tend,  in  certain  cases,  to  be  accom- 

panied by  a displacement  of  population  between  the 
trading  communities 


PAGES 

446— 447 

447— 453 

453—455 

456—459 

460—463 

463—466 

467—469 

469—474 

474—477 

477—483 

483-484 

485—488 

488—491 

492—495 

495—497 


xxii  CONTENTS 


CHAPTER  VI. 

THE  PRINCIPLES  OF  DISTRIBUTIVE  JUSTICE. 

1.  The  present  individualistic  organi.sation  of  society  cannot 

be  maintained  to  be  theoretically  just  on  account  of  its 
long  duration,  or  unjust  on  account  of  its  origin.  . 

2.  The  institution  of  private  property,  as  extended  to  land, 

cannot  be  defended  as  strictly  “realising  freedom,”  or 
as  “ securing  the  fruits  of  labour” ; though  the  gain  to 
labour  in  the  aggregate  from  the  accumulation  of  capital 
that  the  institution  has  caused  vastly  outweighs  its  loss 
through  exclusion  from  appropriated  land. 

3.  It  does  not  appear  that  private  property  and  free  contract 

together  tend  to  give  each  labourer  the  exact  wages  he 
deserves.  But  exact  remuneration  of  desert  seems  an 
unattainable  ideal.  ........ 

4.  It  has  been  believed  that  laisser  faire  gives,  or  will  give, 

the  greatest  possible  equality  of  opportunities  to  labour : 
but  it  certainly  leaves  room  for  serious  inequality 
from  monopoly  and  combination,  from  fluctuations  of 
industry,  .......... 

5.  from  the  unearned  increment  in  the  value  of  land, 

6.  from  the  large  earnings  of  owners  of  capital,  and  from  the 

payment  of  interest,  which  would  not  be  required  if 
capital  were  accumulated  by  the  community.  The 
grounds  for  not  removing  these  inequalities  by  govern- 
mental interference  -Me  productional,  not  distributional. 


CHAPTER  VII. 

ECONOMIC  DISTRIBUTION. 

1.  A more  equal  distribution  of  wealth  tends  primA  facie  to 

increase  happiness ; ....... 

2.  but  we  have  to  allow  for  loss  through  increased  idleness, 

decreased  saving,  lessened  efficiency  of  capital,  pressure 
of  population,  checked  growth  of  culture. 

3.  It  seems  impossible  to  dispense,  as  Communism  seeks  to 

do,  with  the  individualistic  stimulus  to  labour  and  care, 
and  check  to  population.  ...... 

4.  But  the  ideal  of  Socialism  is  not  open  to  the  same  objec- 

tions ; and  a certain  advance  in  the  direction  of  this 


PAGES 

498—500 

501 —  502 

502 —  505 

505 — 508 
508—511 

511—516 

517 — 519 

519—524 

524—526 


CONTENTS 

ideal,  by  a judicious  and  gradual  extension  of  govern- 
mental functions,  is  not  opposed  to  sound  economic 
theory 

5.  The  chief  communistic  institution,  actually  established 

in  England,  is  the  provision  for  poor-relief ; this,  how- 
ever, might  perhaps  be  made  in  other  ways.  . 

6.  Other  distributional  interferences  have  been  usually — and 

rightly — designed  also  to  benefit  production.  In  de- 
termining the  proper  limits  of  such  interference,  one 
important  consideration  is  the  efficiency  of  voluntary 
provision  for  social  needs.  ...... 

7.  In  determining  a “fair”  division  of  produce  between 

opposing  combinations,  an  arbitrary  point  of  departure 
is  necessary ; political  economy  can  only  assist  in 
shewing  how  “fairness”  arbitrarily  defined  is  to  be 
maintained  under  changing  conditions.  . . . . 


CHAPTER  VIII. 

PUBLIC  FINANCE. 

1.  We  have  to  treat  generally  of  the  provision  for  public 

expenditure  (the  .amount  of  which  must  partly  de- 
pend on  the  possibilities  of  conveniently  providing  for 

it) 

2.  The  commodities  required  for  the  use  of  government  are 

generally  obtained  by  free  purchase ; though  in  certain 
circumstances  it  is  more  economical  to  obtain  services — 
especially  of  soldiers— by  direct  compulsion.  . 

3.  The  funds  for  such  purchases,  so  far  as  not  provided  by 

taxation,  may  come  (1)  from  rents,  or  (2)  from  loans, 
which  are  in  certain  circumstances  legitimate,  whether 
for  productive  employment,  or  as  a means  of  lightening 
an  occasional  burden  by  spreading  it  over  a longer 
period,  . . . . . . . 

4.  or  (3)  from  payments  for  commodities  supplied  by  govern- 

ment— the  price  of  which,  when  they  are  monopolised, 
may  be  determined  on  various  principles. 

5.  Taxes,  commonly  so  called,  can  be  only  to  a very  limited 

extent  treated  as  payments  for  services  rendered  by 
government.  ......... 

6.  Distinguishing  “ taxes  proper  ” from  such  payments,  we 

may  note  the  complexity  of  considerations,  political  and 
economical,  productional  and  distributional,  which  ought 
to  have  weight  in  the  selection  of  taxes. 


xxiii 

PAGES 

527—531 

531—536 

537—540 

540—543 

544—546 

546—548 

548—653 

553—558 

568—562 

562—565 


XXIV 


CONTENTS 


7.  We  should  aim  at  proportioning  taxation  mainly  to  that 

part  of  the  taxpayer’s  income  which  is  not  spent  in 
necessaries,  nor  in  ways  socially  useful,  nor  saved  : the 
adjustment  can  at  best  be  rough,  especially  if  taxes  be 
largely  laid  on  commodities — a method,  however,  which 
is  on  several  grounds  to  be  recommended. 

8.  The  incidence  of  taxes  is  hard  to  determine,  from  the  vary- 

ing degrees  of  completeness  and  rapidity  with  which 
their  burden  tends  to  be  transferred : illustrated  ’ by 
taxes  on  incomes,  taxes  on  laud,  ..... 

9.  and  taxes  on  production,  which  as  being  “indirect”  taxes 

are  sometimes  thought  to  be  transferred  completely  to 
the  consumers ; though  in  fact  the  rapidity  and  even  the 
extent  of  the  transference  varies  much  according  to  cir- 
cumstances. ......... 

10.  Such  taxes  are  liable  to  cause  an  extra  loss  to  consumers, 

over  and  above  the  gain  to  the  treasury. 

11.  Taxes  on  inheritance  require  special  and  separate  treat- 

ment. .......... 


CHAPTER  IX. 

POLITICAL  ECONOMY  AND  PRIVATE  MORALITY. 

1.  Political  economy  tends  to  influence  the  common  notion 

of  fair  dealing  especially  in  respect  of  taking  advantage 
of  (a)  ignorance,  ........ 

2.  and  (b)  need.  Properly  understood,  it  does  not  generally 

justify  a man  in  exacting  more  than  the  normal  com- 
petitive price  for  his  service ; but  it  shews  the  danger  of 
condemning  any  one  for  taking  full  advantage  of  com- 
petition, except  in  case  of  extreme  need,  when  humanity 
requires  some  gain  to  be  foregone.  ..... 

3.  Economic  teaching  has  had  a doubtful  efiect  on  the  current 

dislike  of  “rings”  and  other  combinations,  and  on  the 
severer  censure  commonly  passed  on  “making  work,” 
“scamping  work,”  &c.  ....... 

4.  The  egoistic  influences  of  the  individuahstic  organisation 

of  industry  need  to  be  counteracted  : hence  the  moral 
value  of  co-operation.  ....... 

5.  Political  economy  has  exploded  the  fallaicy  that  the  luxu- 

rious expenditure  of  the  rich  benefits  the  poor ; but  it 
has  also  drawn  attention  to  the  dangers  of  almsgiving.  . 


PAGES 

565—569 

569—574 

574—577 
577 — 579 
579—580 

581—585 

585—587 

587—590 

590— 591 

591— 592 


INTRODUCTION 


CHAPTER  I. 

THE  PRESENT  STATE  OF  ECONOMIC  CONTROVERSY  IN  ENGLAND 
AND  THE  SPECIAL  AIM  OF  THE  PRESENT  WORK. 

§ 1.  Some  thirty-five  years  ago,  both  the  Theory  of  Political 
Economy  in  its  main  outlines,  and  the  most  important  practical 
applications  of  it,  were  considered  as  finally  settled  by  the  great 
majority  of  educated  persons  in  England.  Two  causes  appear 
to  have  chiefly  co-operated  in  producing  this  result.  The  pro- 
sperity that  had  followed  on  the  abolition  of  the  corn-laws  had 
given  practical  men  a most  impressive  and  satisfying  proof  of 
the  soundness  of  the  abstract  reasoning  by  which  the  expediency 
of  Free  Trade  had  been  inferred ; and  a masterly  expositor  of 
thought  (J.  S.  Mill)  had  in  1847  published  a treatise  containing 
a skilful  statement  of  the  chief  results  of  the  controversies  of 
the  preceding  generation ; in  which  the  doctrines  of  Ricardo 
were  presented  with  many  of  the  requisite  explanations  and 
qualifications,  and  much  of  what  was  sound  in  the  objections 
and  supplementary  suggestions  of  other  writers  was  duly  taken 
into  account.  It  seemed  that  the  science  had  at  length  emerged 
from  the  state  of  polemical  discussion  on  fundamental  notions 
and  principles,  and  that  whatever  further  remained  to  be  done 
would  be  building  on  a foundation  already  laid.  J.  S.  Mill’s 
language  had  a considerable  share  in  producing  this  belief. 
No  English  thinker,  since  Locke,  who  has  exercised  so  wide  and 
intense  an  influence  on  his  contemporaries,  has  been  generally 
so  little  open  to  the  charge  of  overrating  the  finality — as  regards 

1 


S.  P.  E. 


2 


POLITICAL  ECONOMY 


INTROD. 


either  substance  or  form — of  the  theories  he  has  expounded : 
and  no  one  since  Bacon  has  been  more  concerned  to  point  the 
way  to  the  illimitable  worlds  of  knowledge  that  remain  to  be 
conquered.  Hence  it  is  all  the  more  remarkable  that  he  should 
have  commenced  his  account  of  value  with  the  unhesitating 
assertion  that  “there  is  nothing  in  the  laws  of  value  which 
“ remains  for  the  present  or  any  future  writer  to  clear  up : the 
“ theory  of  the  subject  is  complete.”  It  is  not  surprising  that 
the  younger  generation,  to  whom  his  treatise  soon  became  the 
chief — and  often  the  sole — source  of  economic  knowledge,  should 
be  equally  confident ; and  that  it  should  become  the  fashion  to 
point  to  Political  Economy  as  unique  among  moral  sciences 
for  the  clearness  and  certainty  of  its  method  and  the  admitted 
trustworthiness  of  its  conclusions. 

Probably  many  of  the  generation  taught  by  J.  S.  Mill  were 
not  aware  how  recent  was  the  date  of  this  confident  tone. 
In  fact,  however,  during  the  second  quarter  of  the  nineteenth 
century  almost  every  English  writer  on  Political  Economy 
took  note  in  some  form  or  other  of  the  rudimentary-  and  un- 
settled condition  of  his  study.  For  example.  Senior,  in  an 
Introductory  Lecture  delivered  before  the  University  of  Oxford 
in  1826,  spoke  of  the  science  as  “ in  that  state  of  imperfect 
“development,  which... throws  the  greatest  difficulty  in  the  way 
“ of  a beginner  and  consequently  of  a teacher,  and  offers  the 
“ fairest  scope  to  the  objections  of  an  idle  or  interested  adver- 
“ sary.”  Malthus^  in  the  following  year  remarked  that  “the 
“ differences  of  opinion  among  political  economists  ” have  “ of 
“ late  been  a frequent  subject  of  complaint.”  The  Edinburgh 
Reviewer  of  M‘'Gulloch’s  first  edition  (1831)  characterised 
Political  Economy  as  “ a moral  science  of  which  the  doctrines 
“ are  not  recognised  ” : and  M'^Culloch  himself,  through  his  suc- 
cessive editions,  was  obliged  to  note  that  “ the  differences  which 
“ have  subsisted  among  the  most  eminent  of  its  professors  have 
“ proved  exceedingly  unfavourable  to  its  progress,  and  have 
“ generated  a disposition  to  distrust  its  best  established  con- 
“ elusions.”  Even  in  1852,  when  he  again  addressed  the  Uni- 
versity of  Oxford,  Senior  announced  that  his  subject  was  still 
“ in  a state  of  imperfect  development,’  and  devoted  his  first 


* Definitions  in  Political  Economy  (preface). 


CHAP.  I 


POLITICAL  ECONOMY 


3 


lecture  to  an  explanation  of  “ the  causes  that  have  retarded 
“ its  progress.” 

No  doubt  many  of  these  writers  express  a confident  hope 
that  this  ‘retardation’  will  soon  cease.  M'^Culloch  has  no  doubt 
that  “ the  errors  with  which  the  science  was  formerly  infected 
“are  fast  disappearing,”  and  Colonel  Torrens  ventures  to  prophesy 
more  definitely  that  “ twenty  years  hence  there  will  scarcely 
“ exist  a doubt  respecting  any  of  its  more  fundamental  principles.” 
And  by  the  time  that  Mill’s  work  had  gone  through  several 
editions  an  impression  began  to  prevail  widely  that  this  better 
time  had  actually  arrived.  The  generation  whose  study  of 
Political  Economy  commenced  about  1860  were  for  the  most 
part  but  dimly  conscious  of  the  element  of  stormy  controversy 
from  which  the  subject  had  so  recently  emerged*.  It  is 
true  that  there  were  still  loud  voices  heard  on  the  opposite 
side ; but  comparatively  little  notice  was  taken  of  them. 
For  instance,  the  condemnation  of  Political  Economy  by 


* The  following  extract  from  an  article  in  the  Edinburgh  Review,  vol.  114, 
by  Sir  James  Stephen,  appears  to  represent  accurately  the  view  of  the  sub- 
ject which  was  current  about  the  time  (1861)  that  it  was  written:  and  it  is 
all  the  better  evidence  of  the  general  state  of  opinion,  because  it  occurs 
incidentally  in  an  article  on  ‘English  Jurisprudence.’  “That  some  depart- 
*•  ments  of  human  conduct  are  capable  of  being  classified  with  sufficient 
“ exactness  to  supply  the  materials  of  a true  science  is  conclusively  proved  by 

“ the  existence  of  Political  Economy.” “Political  Economy  is  the  only  moral 

“ science  in  which  definitions  of  fundamental  terms  sufficiently  accurate  to 
“ obtain  general  currency  amongst  all  pei'sons  conversant  with  the  subject  have 
“ yet  been  produced.  The  consequence  has  been  that  the  conclusions  of  those 
“who  understand  the  science  are  accepted  and  acted  on  with  a degree  of 
“ confidence  which  is  felt  in  regard  to  no  other  speculations  that  deal  with 
“ human  affairs.  Political  Economists  can  appeal  to  the  only  test  which  really 
“measures  the  truth  of  a science — success — with  as  much  confidence  as 
“ astronomers.  The  source  of  their  success  has  been  that  they  have  succeeded 
“in  affixing  a precise  meaning  to  words  which  had  for  ages  been  used  by 
“ millions  who  attached  to  them  vivid  but  not  definite  notions,  such  as  wages, 
“ profits,  capital,  value,  rent,  and  many  others  of  the  same  kind.” 

The  preface  to  Fawcett’s  Manual — first  published  in  1863 — exhibits  the 
same  undoubting  confidence  in  the  established  scientific  character  of  Political 
Economy.  It  begins  with  the  following  sentences : 

“I  have  often  remarked  that  Political  Economy  is  more  frequently  talked 
“ about  than  any  other  science,  and  that  its  principles  are  more  frequently 
“appealed  to  in  the  discussions  of  ordinary  life.  No  science,  however,  is 
“perhaps  more  imperfectly  understood.  I believe  that  profound  mathema- 
“ ticians,  or  accomplished  geologists  and  botanists,  are  far  more  numerous  than 
“ real  masters  of  the  principles  of  Political  Economy.” 


1—2 


4 


POLITICAL  ECONOMY 


TXTROD. 


Auguste  Comte  was  generally  disregarded — in  spite  of  the 
great  and  growing  interest  that  was  then  taken  in  the  Positive 
Philosophy — as  being  plainly  irrelevant  to  Mill’s  exposition  of 
the  subject ; in  fact,  it  seemed  to  be  based  on  a misunderstand- 
ing nearly  as  palpable  as  that  involved  in  the  vulgar  dislike  of 
the  political  economist  as  a preacher  of  the  gospel  of  Mammon 
and  selfishness.  I hardly  think  that  even  the  eloquent  diatribes 
of  Mr  Frederic  Harrison^  induced  any  considerable  number  of 
readers — outside  the  working  classes — even  to  doubt  the  esta- 
blished position  of  economic  science.  Nor  did  the  elaborate 
attacks  made  by  Mr  Macleod^  on  the  received  doctrines  succeed 
in  attracting  public  attention : his  books  were  bought  and  read, 
but  were  valued  almost  exclusively  for  their  information  on  the 
special  subject  of  Banking.  Mr  F.  D.  Longe’s  refutation  of  the 
Wages-Fund  Theory  (1867)  fell  quite  dead:  even  the  Quarterly 
Review,  which  in  1871  attacked  Thornton  for  ignoring  his 
obligations  to  Mr  Longe,  and  sneered  at  Mill  for  admitting 
when  urged  by  a friend  a hostile  argument  to  the  force  of 
which  he  had  previously  remained  deaf,  had  up  to  that  date 
never  found  occasion  to  mention  Mr  Longe’s  name. 

In  1871,  however,  these  halcyon  days  of  Political  Economy 
had  passed  away.  Their  termination  was  of  course  not  abrupt ; 
but  so  far  as  any  date  can  be  fixed  for  it,  I should  place  it 
at  the  appearance  of  Mill’s  notice  of  Thornton’s  book  On 
Labour  in  the  Fortnightly  Review  of  March,  1869.  I do  not 
think  that  the  work  itself,  apart  from  the  review,  would  have 
produced  so  much  effect;  since  Thornton’s  criticism  of  the 
Theory  of  Value  shewed  so  serious  a misapprehension  of  the 
general  relation  which  economic  theory  necessarily  bears  to 
economic  facts,  that  a disciple  of  Mill  might  be  pardoned  for 
underrating  the  real  use  and  importance  of  this  and  other  parts 
of  Thornton’s  book.  But  the  manner  in  which  Mill  replied 
to  this  criticism  appeared  to  most  of  his  disciples  highly 
unsatisfactory,  and  the  facility  with  which  he  resigned  a 
doctrine  (the  old  ‘Wages-Fund  Theor\'’)  which  he  had  taught 
for  years  caused  them  an  unexpected  shock ; thus  they  were 
naturally  led  to  give  a more  respectful  attention  not  only  to 

^ Cf.  Fortnightly  Review,  ISC.'j. 

^ In  his  Theory  of  Banking,  1855-6,  and  his  Dictionary  of  Economical 
Philosophy,  1863. 


CHAP.  I 


POLITICAL  ECONOMY 


5 


Thornton’s  assaults,  but  also  to  other  utterances  of  dissent 
from  economic  orthodoxy  to  which  they  had  hitherto  turned  a 
deaf  ear.  A second  shock  was  given  in  1871  by  the  publication 
of  Jevons’s  Theory  of  Political  Economy ; which  took  up  in 
reference  to  the  received  mode  of  treating  the  subject  an 
attitude  almost  similar  to  that  which  each  new  metaphysical 
system  has  hitherto  adopted  towards  its  predecessors.  Again, 
in  1874,  Cairnes’s  Leading  Principles  of  Political  Economy, 
though  written  by  a disciple  of  Mill  and  in  fundamental  agree- 
ment with  his  doctrines,  still  contributed  to  impair  the  unique 
prestige  which  Mill’s  exposition  had  enjoyed  for  nearly  half  a 
generation.  As  a controversialist  Caimes,  though  scrupulously 
fair  in  intention,  was  deficient  in  intellectual  sympathy;  he 
could  hardly  avoid  representing  any  doctrine  that  he  did  not 
hold  in  such  a way  as  to  make  it  almost  inconceivable  to  his 
readers  that  it  could  possibly  have  been  maintained  by  a man 
of  sense ; and  when  this  treatment  was  applied  to  some  of  his 
master’s  most  important  statements,  the  expressions  of  personal 
regard  for  Mill . by  which  it  was  accompanied  only  made  the 
result  seem  more  damaging  to  a reader  who  was  convinced  by 
Cairnes’s  reasoning.  Meanwhile  the  strife  between  Labour  and 
Capital  had  come  to  occupy  more  and  more  of  the  attention  of 
cultivated  society ; and  the  conviction  had  gradually  gained 
ground  that  Political  Economy  had  failed  to  ascertain  the  “ law 
“ that  determines  the  stable  equilibrium  of  work  and  wages  ” * : 
and  even  that  “ the  attempt  to  solve  great  industrial  questions 
“ on  the  hypothesis  which  Mr  Mill  states  to  be  the  fundamental 
“ one  of  Political  Economy  ” — i.e.,  that  men  are  governed  by 
self-interest  only — “ is  to  confuse  rather  than  to  elucidate  the 
“ problems  which  it  behoves  us  to  investigate.” 

In  short,  when  the  concluding  quarter  of  the  nineteenth 
century  began,  it  was  evident  that  Political  Economy  had  returned 
to  the  condition  in  which  it  was  in  the  second  quarter;  and 
that  M‘'Culloch’s  melancholy  admission  that  “ the  differences 
“ which  have  subsisted  among  the  most  eminent  of  its  professors 
“ have  proved  exceedingly  unfavourable  to  its  progress,  and  have 
“generated  a disposition  to  distrust  its  best  established  con- 
“ elusions  ” was  again  only  too  applicable.  This  unfortunate 


1 Cf.  Edinburgh  Review,  vol,  138,  1873. 


6 


POLITICAL  ECONOMY 


IXTROD. 


i-esult  would  probably  have  been  brought  about  merely  by  the 
disputes  and  divergences  of  opinion  among  economists  who 
adhered  to  the  mode  of  treating  the  subject  which  has  pre- 
vailed in  England  since  Ricardo.  But  a powerful  contribution 
to  it  was  supplied  by  a thoughtful  and  independent  vTiter, 
Cliffe  Leslie;  who  in  1870,  in  an  article  on  the  Political 
Economy  of  Adam  Smith,  began  that  attack  on  the  ‘ Ricardian  ’ 
or  ‘ a priori  ’ method  which  he  continued  in  several  subsequent 
articles,  afterwards  reprinted  in  his  Essays  Moral  ar^d  Political. 
One  part  of  Cliffe  Leslie’s  work  consisted  in  drawing  the 
attention  of  English  economists  to  the  movement  in  opposition 
to  their  method  which  had  for  some  time  been  carried  on  in 
Germany,  and  which  has  since  gained  strength  and  exercised 
a wide  influence  outside  Germany  itself  The  leaders  of  this 
movement,  however  widely  they  also  differ  among  themselves, 
are  generally  agreed  in  repudiating  as  “ Manchesterthum  ” — or 
even  “ Smithianismus  ” — the  view  of  Political  Economy  mainly 
adopted  in  England ; and  their  influence  has  constituted  an 
additional  force  under  which  disputes  as  to  particular  doc- 
trines among  English  economists  have  tended  to  broaden  into 
more  fundamental  controversy  as  to  the  general  method  of 
dealing  with  economic  questions.  A reaction  has  manifested 
itself  in  the  so-called  Austrian  school  who,  in  opposition  to 
the  German  historical  school,  insist  on  the  importance  of  an 
abstract  treatment  of  economic  science,  and  who  have  exerted 
some  influence  in  England.  The  doctrines  of  this  school  differ 
widely,  however,  from  the  doctrines  generally  accepted  in  England 
thirty-five  years  ago,  and  their  innovations  have  given  rise  to 
fresh  controversies. 

At  the  same  time  the  opposition  of  influential  artisans  to 
the  traditional  Political  Economy  has  not  diminished,  if  a 
judgment  may  be  formed  from  Mr  Howell’s  Conflict  of  Labour 
and  Capital ; it  has  only  changed  somewhat  from  sullen  distrust 
to  confident  contempt : while,  finally,  the  great  practical  success 
of  Free  Trade — which,  as  was  observed  at  the  outset,  con- 
tributed largely  to  the  prestige  enjoyed  by  Political  Economy 
during  its  halcyon  days  in  the  third  quarter  of  the  last  cen- 
tury— has  recently  been  called  in  question  by  an  apparently 
growing  party  of  practical  men ; and  is  certainly  rendered 
dubious  through  the  signal  disappointment  of  Cobden’s  confident 


CHAP.  I 


POLITICAL  ECONOMY 


7 


expectations  that  the  example  of  England  would  be  speedily 
followed  by  the  whole  civilised  world. 

§ 2.  This  brief  sketch  of  the  recent  history  and  present 
condition  of  Political  Economy  in  England  has  seemed  necessary 
in  order  that  an  explanation  may  be  given  of  the  exact  object  of 
the  present  work,  which  has  been  written  in  the  belief  that  the 
reaction  above  described  against  the  treatment  of  Political 
Economy  as  an  established  science,  whilst  inevitable  and  even 
salutary,  has  been  carried  too  far,  so  that  the  waves  of  disputation 
are  in  danger  of  submerging  the  really  sound  and  valuable 
results  of  previous  thought.  My  primary  aim,  then,  has  been  to 
eliminate  unnecessary  controversy,  by  stating  these  results  in  a 
more  guarded  manner,  and  with  due  attention  to  the  criticisms 
and  suggestions  of  recent  writers.  Several  valuable  contribu- 
tions to  abstract  economic  theory  have  been  made  by  Cairnes, 
Jevons,  and  others,  who  have  written  since  Mill ; but  in  my 
opinion  they  generally  admit  of  being  stated  in  a form  less 
hostile  to  the  older  doctrines  than  their  authors  suppose.  In 
the  same  way  the  opposition  between  the  Inductive  and  Deduc- 
tive Methods  appears  to  have  been  urged  by  writers  on  both 
sides  in  needlessly  sharp  and  uncompromising  terms.  An 
endeavour  will  be  made  to  shew’  that  there  is  an  important 
part  of  the  subject  to  which  economists  are  generally  agreed  in 
applying  a mainly  inductive  or  “realistic”  treatment.  I'  • e 
other  hand,  there  are  probably  few  who  would  deny  the 
and  even  indispensability  of  deductive  reasoning  in  the 
of  Distribution  and  Exchange ; provided  only  the  ac- 
tions on  which  such  reasoning  proceeds  are  duly  state 
their  partially  hypothetical  character  continually  borne  ii 
I fully  admit  the  importance  of  this  latter  proviso;  accordingly 
in  those  parts  of  this  work  in  which  I have  used  chiefly  deduc- 
tive reasoning,  I have  made  it  my  special  aim  to  state  explicitly 
and  keep  clearly  in  view  the  limited  and  conditional  applica- 
bility of  the  conclusions  attained  by  it. 

With  this  view  I have  been  generally  careful  to  avoid  any 
dogmatic  statements  on  practical  points.  It  is  very  rarely,  if 
ever,  that  the  practical  economic  questions  which  are  presented 
to  the  statesman  can  be  unhesitatingly  decided  by  abstract 


1 Cf.  post,  Chapter  iii. 


8 


POLITICAL  ECONOMY 


INTROD. 


reasoning  from  elementary  principles.  For  the  right  solution 
of  them  full  and  exact  knowledge  of  the  facts  of  the  particular 
case  is  commonly  required;  and  the  difficulty  of  ascertaining 
these  facts  is  often  such  as  to  prevent  the  attainment  of  posi- 
tive conclusions  by  any  strictly  scientific  procedure. 

At  the  same  time  the  function  of  economic  theory  in  relation 
to  such  problems  is  none  the  less  important  and  indispensable; 
since  the  practical  conclusions  of  the  most  untheoretical  expert 
are  always  reached  implicitly  or  explicitly  by  some  kind  of 
reasoning  from  some  economic  principles ; and  if  the  principles 
or  reasoning  be  unsound  the  conclusions  can  only  be  right  by 
accident.  For  instance,  if  a practical  man  affirms  that  it  will 
promote  the  economic  welfare  of  England  to  tax  certain  of  the 
products  of  foreign  industry,  a mere  theorist  should  hesitate  to 
contradict  him  without  a careful  study  of  the  facts  of  the  case. 
But  if  the  jjractical  person  gives  as  his  reason  that  “one-sided 
“free  trade  is  not  free  trade  at  all,”  the  theorist  is  then  in  a 
position  to  point  out  that  the  general  arguments  in  favour  of 
the  admission  of  foreign  products  are  mostly  independent  of 
the  question  whether  such  admission  is  or  is  not  reciprocated. 
So  again,  if  it  is  argued  that,  in  order  to  remedy  agricultural 
depression  in  this  country,  a restriction  of  freedom  of  contract 
and  freedom  of  bequest  is  imperatively  requii'ed,  it  would  be 
presumptuous  to  affirm  dogmatically  that  such  restrictions  are 
undesirable.  But  if  the  advocate  of  these  restrictions  explains 
that  they  are  required  in  order  that  more  farming  capital  may 
be  applied  to  the  land,  it  then  becomes  opportune  to  shew  him 
that  so  far  as  land  in  England  is  cultivated,  on  the  average, 
with  an  amount  of  capital  larger  than  that  which  would  give 
the  greatest  proportional  jjroduce,  and  so  far  as  the  fall  in 
farmers’  profits  is  due  to  inci’eased  facilities  of  foreign  importa- 
tion, the  mere  application  of  more  capital  to  the  land  would 
tend  to  aggi’avate  the  fall.  And  similarly  in  dealing  vith  other 
questions  of  the  day,  abstract  economic  arguments  almost  always 
come  in,  and  are  almost  never  by  themselves  decisive. 

In  thus  making  prominent  the  hj-pothetical  character  of 
the  deductive  reasonings  of  Political  Economy,  I am  follow- 
ing the  lines  laid  down  by  J.  S.  Mill  in  his  general  account  of 
economic  method — as  expounded  most  fully  in  his  Essays  on 
Unsettled  Questions  in  Political  Economy  (1843).  This  view  of 


CHAP.  I 


POLITICAL  ECONOMY 


9 


the  subject  rendered  his  whole  treatment  of  it  more  profoundly 
different  from  that  of  Ricardo  and  James  Mill,  than  is  at  first 
apparent  V-  hasty  readers;  though,  as  was  only  natural,  the 
modifications  in  the  old  doctrine,  which  its  consistent  applica- 
tion required,  were  not  always  carried  out  with  perfect  precision 
and  completeness.  Still,  the  work  that  was  actually  done  by  Mill 
in  supplying  corrections  and  limitations  to  the  dogmatism  of 
the  earlier  Ricardian  school  seems  to  me  to  have  an  import- 
ance which  some  recent  critics  have  overlooked ; and  to  which, 
in  my  present  attempt  to  carry  this  work  a stage  further,  I am 
especially  called  upon  to  do  justice. 


JS'ote  on  Ricardo  and  J.  S.  Mill. 

In  the  preface  to  the  second  edition  of  Jevons’s  Theory  of 
Political  Economy — a work  which  was  the  most  important  con- 
tribution to  economic  theory  that  had  been  made  in  England  for  a 
generation — the  lamented  author  announces  as  a concln.sion  to 
which  he  is  “ever  more  clearly  coming,  thajt  the  only  hope  of 
“attaining  a true  system  of  Economics  is  to  fling  aside,  once  and 
“ for  ever,  the  mazy  and  preposterous  assumptions  of  the  Ricardian 
“ School” b He  subsequently  speaks  of  the  doctrines  of  this  school 
as  “ Ricardo-Mill  Economics,”  explaining  how  “that  able  but  wrong- 
“ headed  man,  David  Ricardo,  shunted  the  car  of  Economic  science 
“on  to  a wrong  line,  a line,  however,  on  which  it  was  further  urged 
“towards  confusion  by  his  equally  able  and  wi’ong-headed  admirer 
“John  Stuart  Mill  ”-. 

The  expression  of  opinion  in  these  passages  appears  to  me  exag- 
gerated and  violent,  even  so  far  as  Ricardo  is  concerned  ; while  so 
far  as  it  applies  to  Mill  I cannot  but  regard  it  as  entirely  false  and 
misleading.  I certainly  should  agree  with  Jevons  in  deprecating 
as  excessive  and  overstrained  the  eulogistic  language  in  whicli  many 
competent  judges  have  described  the  work  of  R,icardo.  Though 
undoubtedly  an  original  and  important  thinker,  I cannot  perceive 
that  Ricardo  was  a thoroughly  clear  and  consistent  reasoner ; and  it 
has  always  seemed  to  me  highly  unfair  to  the  deductive  method 

' Theory  of  Political  Economy,  preface,  p.  xlix. 

^ L.  c.  p.  Ivii. 


10 


POLITICAL  ECONOMY 


INTROD. 


of  economics  to  treat  Ricardo’s  writings  as  a peculiarly  faultless 
specimen  of  its  application  At  the  same  time  I hold  that  many  of 
the  characteristic  doctrines  of  Ricardo,  stated  with  proper  qualifica- 
tions and  reserves,  ought  to  find  a place  in  any  complete  exposition 
of  economic  theory ; and  I have  been  careful  to  give  them,  in  the 
present  treatise,  the  place  which  appears  to  me  to  belong  to  them  : 
though  I equally  hold  that  the  statement  of  them  by  Ricardo 
himself  has  frequently  serious,  and  sometimes  glaring,  deficiencies. 
In  some  cases,  as  in  the  determination  of  Wages  and  Profits,  while 
recognising  aii  element  of  truth  in  Ricardo’s  view,  I think  that  the 
defects  of  his  doctrine  are  beyond  patching,  and  that  an  entirely 
new  treatment  of  the  subject  lias  to  be  adopted.  On  the  other  hand, 
as  regards  the  relation  of  Value  to  Cost  of  Production,  Ricardo's 
doctrine  is  of  fundamental  importance  (though  requiring  to  be 
qualified  and  supplemented) ; and  any  teaching  which  ignores  or 
obscures  it  appears  to  me  fatally  defective.  B'^t,  whatever  judgment 
may  be  passed  on  the  work  of  Ricardo,  it  is  certainly  misleading  to 
say  that  Mill  “ urged  the  car  of  Economic  science  further  towards 
“ confusion  ” on  the  “ wrong  line  ” on  which  Ricardo  had  shunted  it. 
Indeed  I am  unable  to  conjecture  how  Jevons  would  have  supported 
a statement  which  appears  to  me  so  perverse.  He  cannot,  I think, 
refer  to  the  general  theory  of  Value,  where  Mill  corrects  and  supple- 
ments Ricardo’s  view,  by  giving  due  place  to  the  operation  of  Supply 
and  Demand  in  the  determination  of  market-price ; and  where  he 
quietly  gets  rid  of  Ricardo’s  serious  confusion  between  Pleasure  of 
Value  and  Cause  or  Determinant  of  Value.  Nor  can  he  have  been 
thinking  of  the  theory  of  Rent ; for  here  Mill’s  exposition  of  the 
Ricardian  doctrine  is  improved  and  guarded  in  several  important 
respects ; especially  by  the  account  taken  of  Carey’s  indisputable 
limitation  of  the  law  of  diminishing  returns,  and  by  the  stress  laid 
on  the  influence  of  general  industrial  progress  in  counteracting  this 
law.  Nor,  again,  can  he  have  in  view  the  theory  of  Wages  and 
Profits ; in  which,  among  other  improvements.  Mill  reduces  to 
harmlessness  Ricardo’s  dangerous  paradox  that  “ wages  cannot  rise 
“without  profits  falling.”  Nor,  finally,  can  his  statement  relate  to 
the  theory  of  International  Values ; since  he  expressly  says  that  this 
is  probably  the  most  valuable  part  of  Mill’s  work.  But  if  J evons’s 
charge  cannot  be  justified  in  relation  to  any  of  the  four  topics  that 
I have  mentioned,  it  is  difficult  to  conceive  how  so  strong  a state- 
ment can  possibly  be  justified  at  all.  It  must  be  admitted  that  on 
more  than  one  important  point  Mill  has  not  made  clear  to  the  reader 
the  interval  that  separates  his  doctrine  from  Ricardo’s : which. 


CHAP.  I 


POLITICAL  ECONOMY 


11 


with  Cliffe  Leslie,  I partly  attribute  to  that  “ piety  of  a disciple  ” 
which  Mill  always  manifests  towards  Ricardo’s  teaching.  This 
disposition  has  had  some  unfortunate  consequences,  and  must  be 
regarded  as  a weakness ; still,  in  a subject  where  most  writers  have 
shewn  so  marked  a tendency  to  emphasise  the  novelty  of  their  ideas, 
and  exaggerate  their  divergence  from  their  predecessors,  it  appears 
to  me  a weakness  that  “leans  to  virtue’s  side.” 


CHAPTER  II. 


SCOPE  OF  POLITICAL  ECONOMY. 

§ 1.  Political  Economy,  in  England  at  least,  is  now  almost 
universally  understood  to  be  a study  or  inquiry  concerned  with 
the  Production,  Distribution,  and  Exchange  of  Wealth  in  a 
society.  I shall  afterwards  * propose,  in  certain  parts  of  the 
inquiry,  to  substitute  for  ‘wealth’  a term  which  will  include  the 
transient  utilities  resulting  from  labour — which  we  call  ‘ser- 
vices’— as  well  as  the  utilities  “embodied  in  material  objects” 
to  which  the  term  ‘wealth’  is  commonly  restricted.  But  since 
the  relations  of  men  to  Wealth,  strictly  taken,  will  in  any  case 
constitute  the  chief  object  of  our  study,  we  may  acquiesce 
provisionally  in  the  definition  above  given : understanding  that 
by  ‘ Production  of  wealth  ’ is  meant  the  production  of  new 
value  or  utility  in  pre-existing  materials ; and  that  under  the 
head  of  ‘ Distribution  and  Exchange  ’ we  examine,  not  the 
material  processes  by  which  goods  are  conveyed  fi’om  place  to 
placed  or  the  legal  processes  by  which  they  are  transferred 
from  owner  to  owner,  but  the  different  proportions  in  which  the 
produce  of  industry  is  shared  among  the  different  economic 
classes  that  have  co-operated  in  producing  it,  the  ratios  in  which 
different  kinds  of  wealth  are  exchanged  for  each  other,  and  the 
causes  determining  these  proportions  and  ratios. 

A more  fundamental  divergence  of  opinion  relates  to  the 
point  of  view  fi’om  which  Political  Economy  contemplates  these 

‘ Cf.  Book  I.  Chapter  iii. 

- It  may  be  observed  that  “distribution”  in  this  material  sense  is,  in  the 
view  of  the  political  economist,  a kind  of  production,  since  it  adds  to  the  utility 
and  value  of  the  goods  conveyed. 


CHAP.  II 


SCOPE  OF  POLITICAL  ECONOMY 


13 


relations.  Is  its  primary  aim  to  establish  certain  general  pro- 
positions, either  positively  or  hypothetically  true,  respecting  the 
coexistence  and  sequence  of  facts,  or  to  give  practical  rules  for 
the  attainment  of  certain  ends  ? Is  it,  in  short — to  use  an  old 
distinction  recently  revived  in  this  connexion — a Science  or  an 
Art  ? The  former  view  is  that  now  generally  adopted  by  writers 
on  economic  theory  in  England.  Their  treatises  no  doubt  in- 
clude topics  belonging" admittedly  to  Art  rather  than  to  Science ; 
namely,  the  discussion  of  the  principles  on  which  Taxation  should 
be  managed  and  of  the  general  nature  and  limits  of  Governmental 
interference,  so  far  as  it  affects  the  amount  or  the  distribution 
of  the  national  wealth.  But  these  matters  are  generally  handled 
by  the  writers  in  question  under  the  head  not  of  Political 
Economy  strictly  speaking,  but  of  its  application  to  Politics 
or  the  Art  of  Government.  They  hold  that  the  precepts  or 
rules  of  this  department  of  practice  are  properly  based,  in  a 
great  measure,  on  the  generalisations  or  deductions  of  Economic 
Science ; but  they  do  not  mean  these  rules  of  Art  when  they 
speak  of  the  ‘ laws  of  Political  Economy  ’ ; and  they  have 
frequently  censured  as  a vulgar  error  the  habit  of  thinking 
and  speaking  of  economic  ‘ laws  ’ as  liable  to  ‘ violation,’  and 
as  needing  to  be  realised  by  voluntary  conformity  or  even 
enforced  by  public  opinion.  Still  this  habit  has  been  found 
very  difficult  to  eradicate  G and  indeed,  the  sharp  distinction 
which  English  economists  have  drawn  between  economic 
theory  and  its  application  to  practice  has  not  worked  itself 
into  the  common  thought  even  of  cultivated  Englishmen,  and 
it  has  not  been  generally  accepted  by  Continental  writers. 
When,  in  discussing  the  same  matters,  one  set  of  disputant's 
blend  the  consideration  of  ‘ what  exists  ’ or  ‘ tends  to  exist  ’ 
with  the  consideration  of  ‘ what  ought  to  be  done,’  while  another 
set  emphatically  distinguish  the  two  questions,  the  gravest 
misunderstanding  is  likely  to  result : hence  it  seems  very 
important  to  examine  carefully  the  causes  and  the  justilica- 
tion,  if  there  be  any,  of  this  widespread  confusion — or  at  least 
fusion — of  distinct  inquiries. 

1 I think  it  may  be  said  that,  at  least  in  nine  cases  out  of  ten,  when  reference 
is  made  by  public  speakers  or  journalists  to  the  laws  of  Political  Economy,  it  is 
implied  that  Political  Economy  prescribes  “freedom  of  contract,”  and  does  not 
merely  assume  it  as  a condition  of  the  applicability  of  its  conclusions. 


14 


POLITICAL  ECONOMY 


INTKOD. 


I 2.  The  causes  are  partly  historical  or  linguistic ; partly, 
again,  they  lie  deep  in  the  nature  of  the  subject  and  the  normal 
conditions  of  the  application  of  the  human  intellect  to  practice. 
To  begin  with  the  former,  we  may  observe  that  the  generic 
term  Economy  has  always  denoted  an  Art  or  method  of  attaining 
a practical  end  rather  than  a Science,  and  that  it  has  naturally 
been  found  difficult  to  alter  its  meaning  altogether  in  prefixing 
to  it  the  epithet  Political ; especially  since,  the  compound 
‘ politico-economical  ’ having  been  found  unendurable,  the 
simjjle  ‘ economical  ’ has  been  used  to  do  adjectival  duty  both 
for  ‘ economy  ’ and  ‘ political  economy.’  Recent  writers,  it  is 
true,  have  generally  used  ‘ economic  ’ as  the  adjective  corre- 
sponding to  ‘ political  economy  ’ : but  though  they  have  thereby 
to  some  extent  obviated  an  ambiguity  of  language’,  they  have 
not  done  away  with  the  general  impression  that  Political 
Economy  is  one  branch  of  a larger  subject  which  includes 
Domestic  Economy  as  another  branch.  This,  of  course,  was 
the  relation  of  the  two  studies  as  originally  conceived : other- 
wise the  term  Political  Economy  would  never  have  come  into 
use.  “ Economy  ” originally  meant,  in  Greek,  the  management 
of  the  affairs  of  a household,  especially  the  provision  and  ad- 
ministration of  its  income ; and  it  was  because  a monarch  or 

1 It  is  worth  observing  that,  in  its  current  use,  the  adjective  “economic” 
retains  its  relation  to  “economy”  in  the  department  of  Production,  where — as 
will  be  pointed  out  subsequently — the  line  between  Science  and  Art  is  par- 
ticularly difficult  to  draw.  Thus  when  the  word  “economic”  is  used  either 
along  with  such  terms  as  “gain,”  “loss,”  “advantage,”  “drawback,”  or  as  a 
term  of  approval  implying  gain  or  advantage,  it  always  refers  to  the  relation  of 
cost  or  expenditure  to  the  quantity  of  some  result  attained  by  it.  An  arrange- 
ment “economically”  preferable  to  some  other  is  one  that  produces  either  a 
given  result  at  a less  cost  or  a greater  amount  of  a certain  kind  of  result  at  no 
greater  cost:  there  is  an  “economic  gain”  when  either  cost  is  saved  or  produce 
increased,  and  an  “economic  loss”  when  the  reverse  of  either  process  occurs. 
There  is  no  similar  use  of  the  term  to  imply  an  ideal  system  of  distributing 
wealth;  we  should  not,  for  instance,  speak  of  laws  relating  to  property  as 
economically  advantageous  or  desirable,  meaning  that  they  led  to  a right 
division  of  property.  M'e  might  no  doubt  speak  of  an  “economic”  distribution 
of  wealth,  no  less  than  of  labour;  but  this  is  really  a contirihation  of  the  view- 
just  stated;  since  in  so  speaking  we  should  be  understood  to  be  assuming  that 
the  end  of  the  distribution  was  to  produce  the  greatest  possible  amount  of 
happiness  or  satisfaction,  and  affirming  that  the  arrangement  spoken  of  as 
“economic”  was  well  adapted  to  this  end.  This  peculiar  use  of  the  adjective 
“economic”  should  be  carefully  noticed;  as  it  is  almost  indispensable,  while  at 
the  same  time  it  is  a little  liable  to  confuse  the  reader. 


CHAP.  II 


SCOPE  OF  POLITICAL  ECONOMY 


1.5 


statesman  was  conceived  to  have  the  function  of  arranging  the 
industry  of  the  country  somewhat  as  the  father  of  a family 
arranges  the  industry  of  his  household,  that  the  Art  which 
offered  him  guidance  in  the  performance  of  this  function  was 
called  Political  Economy.  The  term  is  used  to  denote  the 
financial  branch  of  the  art  or  business  of  government  in  a 
treatise  translated  as  Aristotle’s  in  the  thirteenth  century ; 
and  so  when,  in  the  transition  from  mediaeval  to  modern 
history,  the  question  of  ways  and  means  obtrusively  claimed 
the  attention  of  statesmen,  “ political  economy  ” was  the  name 
naturally  given  to  that  part  of  the  art  of  government  which  had 
for  its  aim  the  replenishment  of  the  public  treasury,  and — as  a 
means  to  this — the  enrichment  of  the  community  by  a provi- 
dent regulation  of  industry  and  trade.  The  term  retained  this 
meaning  for  a considerable  time,  the  enrichment  of  the  people 
coming,  however,  to  be  less  exclusively  regarded  from  the  point 
of  view  of  public  finance,  and  more  sought  as  a condition  of 
social  wellbeing.  If  we  turn,  for  example,  to  Sir  James  Steuart, 
the  first  of  our  systematic  writers,  we  find  that  his  Inquiry  into 
the  Principles  of  Political  Economy  (published  in  1767,  nine 
years  before  the  Wealth  of  Nations)  commences  with  the 
following  account  of  the  subject : 

“ Economy  in  general  is  the  art  of  providing  for  all  the 

“wants  of  a family  with  prudence  and  frugality The  whole 

“ economy  must  be  directed  by  the  head,  who  is  both  lord  and 

“ steward ; as  lord  he  establishes  the  laws  of  his  economy,  as 

“ steward  he  puts  them  into  execution 

“ What  economy  is  in  a family.  Political  Economy  is  in  a 

“ state, but  the  statesman  is  not  master  to  establish  what 

“form  of  economy  he  pleases; the  great  art,  therefore,  of 

“ Political  Economy  is  first  to  adapt  the  different  operations  of  it 
“ to  the  spirit,  manners,  habits,  and  customs  of  the  people,  and 
“ afterwards  to  model  these  circumstances  so  as  to  be  able  to 
“ introduce  a set  of  new  and  more  useful  institutions. 

“ The  principal  object  of  this  science  is  to  secure  a certain 
“ fund  of  subsistence  for  all  the  inhabitants,  to  obviate  every 
“ circumstance  which  may  render  it  precarious ; to  provide 
“ everything  necessary  for  supplying  the  wants  of  the  society, 
“ and  to  employ  the  inhabitants  (supposing  them  to  be  freemen) 
“ in  such  a manner  as  naturally  to  create  reciprocal  relations 


16 


POLITICAL  ECONOMY 


IXTROD. 


“ and  dependencies  between  them,  so  as  to  make  their  several 
“ interests  lead  them  to  supply  one  another  with  their  reciprocal 

“wants Political  Economy  in  each  country  must  necessarily 

“be  different; it  is  the  business  of  a statesman  to  judge 

“ of  the  expediency  of  different  schemes  of  economy,  and  by 
“ degrees  to  model  the  minds  of  his  subjects  so  as  to  induce 
“ them,  from  the  allurement  of  private  interest,  to  concur  in  the 
“ execution  of  his  plan.” 

Before  the  close,  indeed,  of  the  eighteenth  centur}%  an 
essentially  different  view  of  a statesman’s  duties,  in  relation 
to  industry  and  trade,  had  begun  to  be  Avidely  taken,  under  the 
influence  first  of  the  Physiocrats  and  afterwards  of  Adam  Smith. 
Still,  notwithstanding  the  gulf  that  separates  Adam  Smith’s 
economic  doctrine  from  Steuart’s,  he  is  equally  decided  in  re- 
garding Political  Economy  as  a study  with  an  immediate 
practical  endf  “ Political  Economy,”  he  says,  in  the  intro- 
duction to  the  fourth  book  of  the  Wealth  of  Nations  “ proposes 
“ two  distinct  objects : first,  to  provide  a plentiful  revenue 
“ or  subsistence  for  the  people,  or,  more  properly,  to  enable 
“ them  to  provide  such  a revenue  or  subsistence  for  them- 
“ selves ; and  secondly,  to  supply  the  state  or  commonwealth 
“ with  a revenue  sufficient  for  the  public  services.  It  proposes 
“ to  enrich  both  the  people  and  the  sovereign.”  Accordingly 
by  the  “ systems  of  Political  Economy  ” of  which  he  treats 
in  this  book  he  seems  at  the  outset  to  mean  not  systems  in  the 
scientific  sense,  that  is,  connected  sets  of  general  statements 
of  fact ; but  modes  of  organised  governmental  interference  wdth 
a view  to  “ enriching  the  people  and  the  sovereign.”  But  each 
of  these  systems  was  of  course  based  upon  certain  quasi-scientific 
principles,  a certain  view  of  economic  facts ; for  instance,  the 
“ mercantile  ” system  of  restraints  on  importation,  encourage- 
ments of  exportation,  &c.,  rested  on  the  supposition  that  the 
balance  of  gold  and  silver  procured  by  any  branch  of  national 
industry  and  commerce  was  a trustworthy  criterion  of  its  advan- 

1 No  importance  is  to  be  attached  to  the  fact  that  Steuart,  Adam  Smith, 
and  others  call  Political  Economy  a Science  while  defining  it  as  (what  we  shonld 
now  call)  an  Art.  The  present  general  recognition  of  the  distinction  between 
the  two  terms,  in  its  application  to  economic  matters,  is  due,  I think,  to  the 
combined  influence  of  Senior  and  J.  S.  Mill,  and  cannot  be  traced  further  back. 
M'^Culloch,  for  instance,  altogether  ignores  it. 


CHAP.  II 


SCOPE  OF  POLITICAL  ECONOMY 


17 


tage  to  the  country.  Hence  in  his  discussion  of  the  mercantile 
system  Adam  Smith  naturally  expounds  and  refutes  this  quasi- 
scientific  doctrine  (and  the  confusions  and  errors  on  which  it 
was  founded)  along  with  the  practical  deductions  drawn  from  it ; 
though  he  is  chiefly  occupied  in  describing  these  latter  and 
tracing  their  consequences.  So  far  there  is  no  particular  dis- 
advantage in  the  ambiguity  of  the  term  ‘ system  ’ ; as  it  might 
legitimately  denote  either  a body  of  scientific  doctrines  or  a set 
of  practical  precepts,  there  is  no  serious  confusion  caused  by  using 
it  for  a combination  of  the  two. 

But  when  Adam  Smith  passes  in  the  ninth  chapter  to  treat 
of  “ Agricultural  Systems,”  the  ambiguous  term  becomes  a 
manifestly  awkward  instrument  for  the  conveyance  of  his 
meaning,  and  is  certainly  liable  to  cause  a confusion  in  the 
reader’s  mind.  For  we  naturally  expect  to  find  in  an  agri- 
cultural ‘ system  ’ the  same  kind  of  organised  governmental 
interference  in  the  interest  of  agricultural  producers  that  we 
found  in  the  mercantile  system  in  the  interest  of  manufacturers 
and  merchants;  and  in  fact  Adam  Smith’s  own  language 
expressly  suggests  this  antithesis.  He  introduces  his  account 
of  the  views  of  Quesnay  and  the  other  French  Physiocrats, 
which  occupies  two-thirds  of  this  chapter,  by  a reference  to 
Colbert’s  protective  policy ; remarking  that  “ as  in  the  plan  of 
Mr  Colbert  the  industry  of  the  towns  was  certainly  overvalued 
“ in  comparison  with  that  of  the  country,  so  in  their  system  it 
■“  seems  to  be  as  certainly  undervalued.”  He  passes  on  from 
his  discussion  of  the  Physiocrats  to  speak  of  the  policy  of 
China,  Indostan,  and  ancient  Egypt,  which,  as  he  says,  “ favours 
“ agricultuie  more  than  all  other  employments  ” ; he  also  refers 
to  the  ancient  republics  of  Greece  and  Rome,  whose  policy 
“ honoured  agriculture  more  than  manufactures  (though  it 
“ seems  rather  to  have  discouraged  the  latter  employments  than 
“ to  have  given  any  direct  or  intentional  encouragement  to  the 
“ former).”  And  he  concludes  by  arguing  that  “ those  agricul- 
“tural  systems... which  preferring  agriculture  to  all  other  em- 
“ployments,  in  order  to  promote  it,  impose  restraints  upon 
“manufactures  and  foreign  trade... really  and  in  the  end  dis- 
“ courage  their  own  favourite  species  of  industry... and  are 
“ therefore  more  inconsistent  than  the  mercantile  system  ” ; 
and  that,  therefore,  “ all  systems  of  preference  and  restraint 

2 


S.  P.  E. 


18 


POLITICAL  ECONOMY 


INTROD. 


“ should  be  completely  taken  away.”  Hence  the  careless  reader 
might  excusably  carry  away  the  impression  that  Quesnay’s 
doctrine,  which  was  certainly  a “ system  of  preference  ” for 
agriculture,  was  like  the  “ plan  of  Mr  Colbert,”  a system  of  legal 
regulation  and  restraint : and  even  the  careful  reader,  if  not 
previously  informed  on  the  subject,  must  be  .startled  when  he 
suddenly  learns  that  in  Quesnay’s  view  “ perfect  liberty  ” was 
“the  only  effectual  expedient”  for  encouraging  agriculture; 
and  that  the  only  po.sitive  governmental  interference  proposed 
by  the  Physiocrats,  as  a deduction  from  their  speculative 
preference  for  agriculturists,  was  the  raising  of  all  revenue  by 
an  “ irnpot  unique  ” on  rent. 

The  truth  is  that  Adam  Smith  has  really  not  seen  the 
extent  to  which,  in  the  hands  of  the  Physiocrats  as  well  as 
his  own,  the  method  of  Political  Economy  has  changed  its 
fundamental  character  and  become  the  method  of  a science 
rather  than  an  art : since  the  change  is  due  not  to  any 
difference  in  the  question  primarily  asked  by  the  economic 
inquirer,  but  to  the  entirely  different  answer  now  given  to  it. 
The  question  is  still  the  same,  “ How  to  make  the  nation  as  rich 
“ as  possible  ” : but  as  the  answer  now  is  “ By  letting  each 
“■member  of  it  make  himself  as  rich  as  he  can  in  his  own  wav,” 
that  portion  of  the  old  art  of  Political  Economy  which  professed 
to  teach  a statesman  how  to  “ provide  a plentiful  revenue  or 
“ subsistence  for  the  people  ” becomes  almost  evanescent : since 
the  only  service  of  this  kind  which  the  sovereign  can  render — 
besides  protecting  his  subjects  from  the  violence  of  foreigners 
and  from  mutual  oppression  and  injustice — is  to  “erect  and 
“ maintain  certain  public  works  and  certain  public  institutions, 
“ which  it  can  never  be  for  the  interest  of  any  individual,  or  any 
“ small  number  of  individuals,  to  erect  and  maintain.”  What 
remains  for  Political  Economy  to  teach  the  statesman  is  merely 
how  to  provide  himself  with  a “ revenue  sufficient  for  the  public 
“ services  ” in  the  best  possible  way : and  accordingly  such 
teaching,  since  Adam  Smith’s  time,  has  constituted  the  sole 
»jr  chief  part  of  Political  Economy  considered  as  an  art.  As 
regsirds  the  “ plentiful  revenue  or  subsistence  of  the  peojde,” 
Adam  Smith,  instead  of  shewing  the  statesman  how  to  pro- 
vide it,  has  to  shew"  him  how  Nature  herself  would  make 
ample  provision  if  only  the  statesman  would  abstain  ifom 


CHAP.  II 


SCOPE  OF  POLITICAL  ECONOMY 


19 


interfering  with  her  processes : instead  of  recommending  laws 
(in  the  jurist’s  sense)  by  which  the  national  production  and 
distribution  of  wealth  ought  to  he  governed,  he  has  to  trace  the 
laws  (in  the  naturalist’s  sense)  by  which  these  processes  actually 
are  governed.  In  short,  the  substance  of  his  economic  doctrine 
naturally  leads  him  to  expound  it  in  the  form  of  the  science  to 
which  later  writers  have  applied  the  name  of  Political  Economy; 
before  entering  (in  Book  v.)  on  the  discussion  of  the  principles 
of  the  Art  of  Political  Economy,  of  which  the  legitimate  sphere 
is,  in  his  view,  reduced  to  the  principles  of  governmental  expen- 
diture and  taxation. 

I 3.  But  however  great  the  change  that  was  thus  made, 
through  the  teaching  of  the  Physiocrats  and  Adam  Smith  com- 
bined, in  the  current  conception  of  Political  Economy,  it  is 
important  to  observe  that  the*  transition  thus  effected  from 
Art  to  Science  was,  in  the  nature  of  the  case,  incomplete. 
Political  Economy  became  primarily  a study  of  ‘ what  is  ’ rather 
than  of  ‘ what  ought  to  be  done  ’ : but  this  was  because  the  two 
notions  were,  at  least  to  a considerable  extent,  identified  in  the 
political  economist’s  contemplation  of  the  existing  processes  of 
the  production  and  distribution  of  wealth.  He  described  and 
analysed  these  processes,  not  only  to  shew  what  they  were,  but 
also  to  shew  that  they  were  not  likely  to  be  improved  by  human 
restraints  and  regulations.  This  is  true  not  only  of  Adam  Smith, 
but  of  almost  all  his  disciples  and  successors  for  more  than  half 
a century.  It  should  be  noted,  however,  that  they  have  main- 
tained this  identity  of  the  actual  with  the  ideal  in  very  different 
degrees  and  on  very  different  grounds ; and  that  a considerable 
amount  of  mutual  misunderstanding  and  mistaken  inference 
has  resulted  from  not  observing  these  differences.  Such  mis- 
understanding has  been  a good  deal  aided  by  the  ambiguity  of 
the  term  ‘ natural,’  applied  by  Adam  Smith,  Ricardo,  and  others, 
to  the  shares  of  different  producers  as  determined  by  the  eco- 
nomic laws  which  these  ivriters  expound.  For  by  the  term 
‘ natural  ’ as  commonly  used,  the  notion  of  ‘ what  generally  is,’ 
or  ‘ what  would  be  apart  from  human  interference,’  is  suggested 
in  vague  combination  with  that  of  ‘ what  ought  to  be  ’ or  ‘ what 
is  intended  by  a benevolent  Providence  ’ : and  it  is  not  always 
easy  to  say  in  what  proportions  the  two  meanings  are  mixed 
by  any  particular  writer.  Indeed  it  is  somewhat  difficult  to 

2—2 


20 


POLITICAL  ECONOMY 


INTHOD. 


determine  this  even  in  the  case  of  Adam  Smith  himself. 
There  is  no  doubt  that— as  Mr  Cliffe  Leslie  ^ has  pointed 
out — Adam  Smith’s  advocacy  of  the  “obvious  and  simple  sys- 
“ tern  of  natural  liberty  ” is  connected  with  his  strongly  marked 
theistic  and  optimistic  view  of  the  order  of  the  physical  and 
social  world.  He  is  convinced  that  “ all  the  inhabitants  of  the 
“ universe  are  under  the  immediate  care  and  protection  of  that' 
“great,  benevolent,  and  all-\vise  Being,  who  directs  all  the 
“ movements  of  nature,  and  who  is  determined,  by  his  o\vn 
“ unalterable  perfections,  to  maintain  in  it,  at  all  times,  the 
“ greatest  possible  quantity  of  happiness  ” - : and  this  conviction 
gives  him  a peculiar  satisfaction  in  tracing  the  various  ways  in 
which  the  public  interest  is  “ naturally  ” promoted  by  the  spon- 
taneous co-operation  of  individuals  seeking  each  the  greatest 
pecuniary  gain  to  himself  At  the  same  time  he  is  too  cool  an 
observer  of  social  facts  to  caiT}"  this  optimism  to  an  extravagant 
pitch.  He  takes  care  to  point  out,  for  instance,  that  the  “ in- 
“ terest  of  the  employers  of  stock  ” has  “ not  the  same  connexion 
“ with  the  general  interest  of  society  ” as  that  of  landlords  and 
labourers : and  even  that  “ the  interest  of  the  dealers  in  an}- 
“ particular  branch  of  trade  or  manufactures  is  always  in  some 
“ respect  different  from  and  even  opposite  to  that  of  the 
“ public  ” ^ So  again  when  he  speaks  of  “ hands  naturally 
“ multiplying  beyond  their  employment  ” in  the  stationar}-  state 
of  a country’s  wealth,  and  describes  the  “ starving  condition  of 
“ the  labouring  poor  as  a natural  S}Tnptom  of  the  declining 
“ state,”  we  can  hardly  suppose  that  the  term  “ natural  ” is  in- 
tended directly  to  imply  the  design  of  a benevolent  Providence. 
The  Natural  is  here  what  actually  exists  or  what  tends  to  exist 
according  to  general  laws,  apart  from  casual  disturbances  and 
deliberate  human  interference.  In  consideration  of  these  and 
similar  passages  we  should,  I think,  refrain  from  attributing  to 
Adam  Smith  a speculative  belief  in  the  excellence  of  the  exist- 
ing arrangements  for  producing  and  distributing  wealth,  to 
any  further  extent  than  is  required  to  support  his  practical 
conclusion  that  they  are  not  likely  to  be  bettered  by  the 

1 In  an  Essay  on  the  Political  Economj-  of  Adam  Smith,  reprinted  in 
Essays  in  Political  and  Moral  Philosophy. 

2 Theory  of  Moral  Sentiments,  Part  VI.  § ii.  c.  iii. 

* Wealth  of  Nations,  Book  I.  c.  xi. 


CHAP.  II 


SCOPE  OF  POLITICAL  ECONOMY 


21 


interference  of  government.  Still  less  should  we  attribute  to 
him  any  intention  of  demonstrating  that  these  arrangements 
realise  distributive  justice,  in  the  sense  that  each  man’s  remu- 
neration is  an  exact  measure  of  the  service  that  he  renders  to 
society.  On  the  contrary,  he  expressly  affirms  the  opposite  of 
this  in  the  case  of  the  landlord,  whose  rent  “ costs  him  neither 
“ labour  nor  care  ” and  is  “ not  at  all  proportional  to  what  the 
“ landlord  may  have  laid  out  upon  the  improvement  of  the  land, 
“ or  to  what  he  can  afford  to  take ; but  to  what  the  farmer  can 
“ afford  to  give.”  If  at  the  same  time,  as  a Moralist  and 
Natural  Theologian,  he  holds  that  there  is  nothing  unjust  in 
the  established  order  of  distribution,  and  that  each  individual 
is  duly  provided  for  by  a beneficent  Providence,  it  is  not  be- 
cause he  considers  that  each  enjoys  wealth  in  proportion  to  his 
deserts,  but  rather  because  he  sincerely  believes  in  the  delu- 
siveness— so  far  as  the  individual  is  concerned — of  the  common 
struggle  to  get  rich,  and  holds  that  happiness  is  equally  distri- 
buted among  the  different  ranks  of  society  in  spite  of  their  vast 
inequalities  in  wealth  L 

There  is,  therefore,  a great  interval  between  the  position  of 
Adam  Smith  and  that,  for  instance,  of  Bastiat.  In  Bastiat’s 
conception  of  the  fundamental  problem  of  Political  Economy 
the  questions  of  Science  and  Art  are  completely  fused ; his  aim 
being,  as  his  biographer  says,  “ to  prove  that  that  which  is  ” — or 
rather  would  be,  if  government  would  only  keep  its  hands  off — 
“ is  conformable  to  that  which  ought  to  be  ” : and  that  every 
one  tends  to  get  exactly  his  deserts  in  the  economic  order  of 
unmodified  competition.  None  of  the  English  followers  of 
Adam  Smith  has  ever  gone  so  far  in  this  direction  as  Bastiat ; 
and  the  most  eminent  of  them,  Ricardo,  represents,  we  may  say, 
the  opposite  pole  in  the  development  of  Adam  Smith’s  doctrine. 
When  Ricardo,  using  Adam  Smith’s  term  to  denote  a somewhat 
different  fact,  speaks  of  the  “ natural  ” price  of  labour,  his  phrase 
carries  with  it  no  optimistic  or  theistic  suggestions  whatsoever ; 
he  means  simply  the  price  which  certain  supposed  permanent 
causes  are  continually  tending  to  produce.  Indeed  he  explains 
that  “ in  an  improving  society  ” the  market-price  of  labour  may 
remain  an  indefinite  time  above  the  “ natural  ” price ; and  he 


1 Cf.  Theovy  of  Moral  SentimenU,  Part  IV.  c.  i. 


22 


POLITICAL  ECONOMY 


INTEOD. 


contemplates  with  an}-thing  but  satisfaction  the  result  of  the 
“ natural  advance  of  society,”  which  in  his  view  tends  to  the 
benefit  of  landlords  alone.  He  remains  true,  no  doubt,  to  Adam 
Smith’s  “ system  of  natural  liberty  ” as  regards  the  distribution 
of  produce  no  less  than  the  direction  of  industr}-  ; but  he  is 
further  even  than  Adam  Smith  from  any  attempt  to  demon- 
strate a necessary  harmony  of  interests  among  the  producers, 
whom  he  would  leave  to  settle  their  shares  by  fi:ee  contract. 
In  fact,  two  of  his  most  characteristic  doctrines  are  diametric- 
ally opposed  to  any  such  hamiony : his  demonstrations,  namely, 
that  marked  improvements  in  agidculture  have  a tendency  to 
diminish  rent,  and  that  the  substitution  of  machinery  for  human 
labour  is  often  very  injurious  to  the  interests  of  the  cla.ss  of 
labourers.  And  thougli  he  is  averse  to  any  direct  legislative 
interference  with  the  natiu'al  detennination  of  wages,  he  is 
disposed  to  encourage  “ some  effort  on  the  part  of  the  legis- 
“ lature  ” to  secure  the  comfort  and  well-being  of  the  poor 
by  regulating  the  increase  of  their  numbers.  This  last  sug- 
gestion indicates  a main  source  of  the  ditierence  between 
Ricardo’s  teaching  and  that  of  his  great  predecessor.  It  was 
the  Malthusian  view  of  Population  which  rendered  the  optimism 
of  the  eighteenth  century  impossible  to  English  economists  of 
the  nineteenth.  If  the  tendenc}"  of  Nature  left  alone  was  to 
produce,  as  the  ultimate  outcome  of  social  progress,  a multi- 
tude of  labourers  on  the  verge  of  .starvation,  it  was  difficult 
to  contemplate  her  processes  with  anything  like  enthusiasm. 
A less  “jaundiced”  mind  than  that  of  the  hero  of  Locksley 
Hall  might  well  feel  depressed  at  the  prospect, 

“Slowly  comes  a hungry  people,  as  a lion  creeping  nigher 

“ Glares  at  one  that  nods  and  winks  beside  a slowly’  dying  fire.” 

Hence  in  England,  the  more  thoughtful  even  of  tliose  eco- 
nomists, who  have  adhered  in  the  main  to  Adam  Smith’s 
limitations  of  the  sphere  of  government,  have  enforced  these 
limitations  sadly  rather  than  triumphantly ; not  as  admirers 
of  the  social  order  at  present  resulting  from  “ natural  liberty,” 
but  as  convinced  that  it  is  at  least  pi-eferable  to  any  artificial 
order  that  government  might  be  able  to  substitute  for  it. 

Still  it  remains  true  that  “ orthodox  ” Political  Economy,  in 
England  no  less  than  on  the  Continent,  has  generally  included 
an  advocacy  of  Laisser  Faire ; and  that  not  only  in  treating  of 


CHAP.  II 


SCOPE  OF  POLITICAL  ECONOMY 


23 


the  attempts  to  regulate  Production,  with  which  Adam  Smith 
was  practically  most  concerned,  but  also  in  dealing  with  the 
questions  of  Distribution,  which  the  movement  of  nineteenth 
century  thought  has  brought  into  continually  greater  promi- 
nence. If  our  orthodox  economists  have  not  gone  the  length 
of  maintaining  that  distribution  by  free  competition  is  perfectl}" 
jiist,  as  proportioning  reward  to  service,  they  have  still  gener- 
ally maintained  it  to  be  practically  the  best  mode  of  dividing 
the  produce  of  the  organised  labour  of  human  beings ; they 
have  held  that  through  the  stimulus  it  gives  to  exertion,  the 
self-reliance  and  forethought  that  it  fosters,  the  free  play  of 
intellect  that  it  allows,  it  must  produce  more  happiness  on  the 
whole  than  any  other  system,  in  spite  of  the  waste  of  the 
material  means  of  happiness  caused  by  the  luxurious  expendi- 
ture of  the  rich.  Or  if  they  have  not  even  gone  so  far  as  this, 
they  have  at  any  rate  taught  that  it  is  inevitable,  and  that  any 
attempt  to  deviate  from  it  will  be  merely  throwing  effort  away. 
Thus,  by  one  road  or  another,  they  have  been  led  to  the  same 
practical  conclusion  in  favour  of  non-interference ; and  it  is 
hardly  sui-prising  that  practical  persons  have  connected  this 
conclusion  with  the  economic  doctrines  with  which  it  was  found 
in  company,  and  have  regarded  it  as  an  established  “ law  of 
“ political  economy  ” that  all  contracts  should  be  free  and  that 
every  one  should  be  paid  exactly  the  market-price  of  his 
services. 

It  must  be  obvious,  however,  as  soon  as  it  is  pointed  out, 
that  the  investigation  of  the  laws  that  determine  actual  prices, 
wages,  and  profits,  so  far  as  these  depend  on  the  free  competi- 
tion of  individuals,  is  essentially  distinct  from  the  inquiry 
how  far  it  is  desirable  that  the  action  of  free  competition 
should  be  restrained  or  modified — whether  by  the  steadying 
force  of  custom,  the  remedial,  intervention  of  philanthropy, 
the  legislative  or  administrative  control  of  government,  or  the 
voluntary  combination  of  masters  or  workmen.  So  far  as  the 
purely  scientific  economist  studies  primarily  the  results  that 
tend  to  be  produced  by  perfectly  free  competition,  it  is  not 
because  he  has  any  predilection  for  this  order  of  things — for 
science  knows  nothing  of  such  preferences — but  merely  because 
its  greater  simplicity  renders  it  easier  to  grasp.  He  holds  that 
a knowledge  of  these  simpler  relations  precedes,  in  the  order 


24 


POLITICAL  ECONOMY 


INTROD. 


of  study,  the  investigation  of  the  more  complex  economic 
problems  that  result  from  competition  modified  by  disturbing 
causes*.  But  the  adoption  of  competition  perfectly  free  and  per- 
fectly active  as  a scientific  ideal — as  a means  of  simplifying  the 
economic  facts  which  actual  society  presents,  for  the  convenience 
of  general  reasoning — does  not  imply  its  adoption  as  a practical 
ideal,  which  the  statesman  or  philanthropist  ought  to  aim  at 
realising  as  completely  as  possible.  Even  if  we  conclude  wth 
Bastiat  that  unrestricted  competition  would  give  every  man 
his  deserts  and  otherwise  bring  about  the  best  of  all  possible 
economic  worlds,  we  must,  in  order  to  reach  this  conclusion, 
adopt  some  principle  for  determining  what  a man’s  deserts  are, 
some  criterion  of  social  wellbeing  which  carries  us  beyond  the 
merely  scientific  detennination  of  wages,  profits,  and  prices. 
In  short,  as  regards  the  whole  department  of  distribution  and 
exchange,  the  Art  of  Political  Economy — if  we  admit  the  notion 
of  art  at  all — is  easily  and  completely  distinguishable  from  the 
scientific  study  of  economic  facts  and  laws. 

I 4.  The  case  is  different  with  Production : and  it  is  to  be 
observed  that  in  the  original  treatment  of  Political  Economy  as 
a directly  practical  inquiry  it  w^as  the  improvement  of  Produc- 
tion rather  than  Distribution  that  was  taken  as  its  practical  end. 
Thus  Adam  Smith’s  opening  paragraphs  represent  as  his  main 
object  the  investigation  of  the  conditions  which  determine  a 
nation’s  annual  supply  of  the  necessaries  and  conveniences  of 
life  to  be  abundant  or  scanty.  His  first  book  begins  with  a 
discussion  of  “ the  causes  of  the  improvement  in  the  productive 
“ power's  of  labour  ” ; in  his  second  book  he  is  occupied  in  con- 
sidering the  fundamental  importance  of  “stock”  to  production, 
and  “ the  different  quantities  of  labour  which  it  puts  in  motion, 
“ according  to  the  different  ways  in  which  it  is  employed.”  In 
the  third  he  describes  the  diverse  plans  that  nations  have  fol- 
lowed in  the  general  direction  of  labour,  with  the  aim  of  making 

' The  statement  in  the  text  represents,  I think,  the  general  view  of  econo- 
mists, which  I am  here  trying  to  give;  but  it  does  not  exactly  represent  my 
own  view  as  regards  one  of  these  disturbing  causes,  namely,  voluntary  com- 
bination. For  combination  among  the  sellers  of  any  commodity  places  the 
persons  combining  in  a position  economically  similar  to  that  of  a monopolist; 
and  though  the  laws  that  govern  prices  under  the  condition  of  monopoly  are 
different  from  those  that  result  from  free  competition,  they  do  not  appear  to 
be  necessarily  more  complex.  Cf.  post.  Book  II.  c.  ii.  and  c.  x. 


CHAP.  II 


SCOPE  OF  POLITICAL  ECONOMY 


25 


its  produce  as  great  as  possible ; and,  as  we  have  seen,  the 
“ systems  of  political  economy  ” discussed  in  his  fourth  book 
were  systems  framed  with  a view  to  the  same  end.  On  the  other 
hand  he  hardly  considers  Distribution  as  a practical  problem ; 
and  so  far  as  he  does  raise  the  question,  how  a more  “ liberal 
“ reward  of  labour  ” may  be  attained,  his  answer  seems  to  be 
that  it  can  only  be  attained  by  “ increasing  the  national 
“ wealth,”  or  in  other  words  by  solving  the  practical  problem  of 
Production.  So  again,  in  the  brief  but  pregnant  treatise  on  the 
Elements  of  Political  Economy  written  a generation  later  by 
James  Mill,  it  is  noticeable  that  in  describing  the  scope  of  his 
chapter  on  Production  he  puts  prominently  forward  its  directly 
practical  aim : . its  object  is,  he  says,  to  “ascertain  by  what 
“ means  the  objects  of  desire  may  be  produced  with  the  greatest 
“ ease  and  in  greatest  abundance,  and  upon  these  discoveries, 
“ when  made,  to  form  a system  of  rules  skilfully  adapted  to  the 
“ end.”  Whereas,  when  he  comes  to  speak  of  the  laws  of  Distri- 
bution, it  never  occurs  to  him  even  to  hint  that  the  process 
investigated  admits  of  being  improved,  and  that  the  student 
ought  to  keep  this  improvement  in  view.  And  in  the  account 
of  the  objects  of  Political  Economy  given  ten  years  later  by 
M'^Culloch,  this  difference  in  the  treatment  of  the  different 
inquiries  is  equally  marked. 

Nor  is  it  difficult  to  understand  how  this  difference  comes  to 
be  maintained.  In  dealing  with  questions  of  Production,  the 
obvious  and  uncontroverted  aim  of  all  rational  effort — public  or 
private — is,  other  things  being  equal,  to  produce  as  much  as 
possible  in  proportion  to  the  cost.  The  extent  to  which  this 
aim  is  realised  is  the  most  interesting  point  to  observe  in 
examining  the  actual  process  of  production  in  different  ages 
and  countries ; and  this  is  also  the  criterion  which  we  adopt 
naturally  and  without  reflection  when  we  judge  different 
methods  of  production  to  be  better  or  worse.  Hence  the 
transition  from  the  point  of  view  of  Science  to  that  of  Art  is,  in 
this  part  of  the  subject,  easy  and  almost  imperceptible ; the 
conclusions  of  the  former  are  almost  immediately  convertible 
into  the  precepts  of  the  latter.  Accordingly  we  find  that  even 
the  most  careful  of  the  writers  who,  like  J.  S.  Mill,  have  taken 
special  pains  to  present  Political  Economy  as  primarily  a Science, 
give  a prominent  place  in  this  part  of  their  work  to  the  dis- 


26 


POLITICAL  ECONOMY 


ISTROD. 


cussion  of  the  good  and  bad  results  of  different  modes  of 
production.  They  analyse  the  gain  derived  from  the  Division 
of  Labour,  and  note  the  counterbalancing  drawbacks ; they 
compare  the  advantages  and  disadvantages  of  the  “grande”  and 
“petite  culture”  in  farming;  they  consider  what  kinds  of  busi- 
ness are  adapted  to  management  by  joint-stock  companies — all 
topics  which  clearly  Vjelong  to  the  discussion  of  Production 
regarded  as  an  Art.  I do  not  myself  think  that  these  practical 
questions  should  be  treated  decisively'in  a general  treatise  on 
Economic  Science ; since  any  adequate  discu.ssion  of  them  must 
involve  an  amount  of  technical  detail  unsuitable  to  such  a 
treatise.  But  it  does  not  seem  possible  to  draw  a shaqj  line 
between  the  “technical”  and  the  “economic”  aspects  of  these 
questions ; and  in  any  case  it  is  the  admitted  business  of  an 
economist,  in  studying  social  jjroduction,  to  investigate  the 
causes  by  which  the  labour  of  any  society  is  rendered  more  or 
less  productive  of  wealth  ; and  such  an  investigation  necessarily 
goes  far  to  supply  an  answer  to  the  question  “ how  the  produce 
“ of  labour  may  be  made  as  great  as  possible.” 

§ 5.  At  the  same  time,  although  in  discussing  the  conditions 
more  or  less  favourable  to  Production  we  inevitably  approach 
the  margin  which  divides  Art  from  Science,  I have  thought  it 
expedient  to  reserve  as  much  as  possible  for  a separate  inquiiy 
the  discussion  <jf  the  principles  of  governmental  interference 
with  industry:  whether  with  a view  to  a better  organised  Pro- 
duction or  a more  satisfactory  Distribution  of  wealth : since  I 
conform  so  far  to  the  older  and  more  popular  view  of  my  subject 
as  to  consider  the  discussion  of  these  principles  an  integral  part 
of  the  theory  of  Political  Economy. 

N.  W.  Senior  was  one  of  the  first  economists  who  definitely 
proposed  to  confine  the  name  Political  Economy  to  the  theoreti- 
cal branch  of  the  subject,  leaving  the  practical  branch  to  be 
absorbed  in  the  general  art  of  government ; and  as  this  ^•iew  of 
the  scope  of  the  study  has  since  been  the  prevalent  rdew  among 
English  economists,  it  ma}'  be  convenient  to  examine  briefly 
the  arguments  by  which  Senior  justifies  the  innovation.  He 
begins  by  fully  recognising  the  importance  of  the  questions 
which  the  practical  branch  of  Political  Econom}',  as  previously 
conceived,  attempts  to  answer.  Inquiries,  he  says,  as  to  the 
means  by  which  the  industry  of  man  may  be  rendered  more 


CHAP.  II 


SCOPE  OF  POLITICAL  ECONOMY 


27 


productive  by  the  action  of  government,  as  to  the  distribution  of 
wealth  most  desirable  in  a given  state  of  society,  and  as  to  the 
means  by  which  any  given  country  may  facilitate  such  a distri- 
bution— such  inquiries  are  undoubtedly  of  great  interest.  But 
“ they  no  more  form  part  of  the  science  of  political  economy  than 
“ navigation  forms  part  of  the  science  of  astronomy.  The  prin- 
“ ciples  supplied  by  political  economy  are  indeed  necessary 
“ elements  in  their  solution  but  they  are  not  the  only  or  even 
“ the  most  important  elements.... They  involve,  as  their  general 
“ premisses,  the  consideration  of  the  whole  theory  of  morals,  of 
“ government,  and  of  civil  and  criminal  legislation ; and  for 
“ their  particular  premisses,  a knowledge  of  all  the  facts  which 
“ alfect  the  community  which  the  economist  proposes  to  in- 
“ fluence.”  The  statesman,  he  explains,  who  has  practically  to 
solve  these  questions,  must  consider  all  the  causes  which  may 
promote  or  impede  the  general  welfare  of  the  society  for  which 
he  proposes  to  legislate ; the  political  economist,  whose  .syste- 
matic attention  has  been  concentrated  on  wealth,  “ has  con- 
“sidered  only  one,  though  the  most  important,  of  those  causes”: 
accordingly  his  scientific  conclusions,  however  true,  “ do  not 
“ authorise  him  in  adding  a single  syllable  of  advice.”  His 
business  as  a political  economist  “ is  neither  to  recommend  nor 
“ to  dissuade,  but  to  state  general  principles  which  it  is  fatal  to 
“ neglect,  but  neither  advisable  nor  perhaps  practicable  to  use 
“as  the  sole  or  even  the  principal  guides  in  the  conduct  of 
“ affairs.”  Substantial!}"  the  same  view  was  expressly  adopted 
by  J.  S.  Mill,  though  the  plan  of  his  popular  and  influential 
Principles  of  Political  Economy  is  not  framed  in  accordance 
with  it.  With  characteristic  eclecticism,  while  he  includes  in 
his  treatise  a discussion  of  the  questions  of  the  old  art  of 
Political  Economy — even  with  .some  startling  enlargements — he 
does  not  introduce  these  discussions  as  belonging  to  Political 
Economy  strictl}- : but  as  mingling  Political  Economy  with  social 
philosophy.  The  same  view  was  also  effectively  expounded, 
some  years  later,  by  J.  E.  Cairnes  in  his  Lectures  on  the  Cha- 
racter and  Logical  Method  of  Political  Economy,  with  still 
more  pronounced  antagonism  to  the  older  view  than  even  Senior 
had  shewn.  “ Political  Economy,”  says  Cairnes,  “ stands  neutral 
“ between  competing  social  schemes,  as  the  science  of  mechanics 
“ stands  neutral  between  competing  plans  of  railway  construction. 


28 


POLITICAL  ECONOMY 


INTROD. 


“ as  chemistry  stands  neutral  between  competing  plans  of  sanitary 
“improvement”:  it  has,  accordingly,  “nothing  to  do  with  laisser 
“faire.”  And  since  Caimes,  the  majority  of  English  writers 
who  have  regarded  Political  Economy  as  a scientific  study  have 
taken  substantially  the  same  view  of  its  scope. 

There  is  no  doubt  i^uch  force  in  the  arguments  of  these 
writers,  so  far  as  they  tend  to  the  conclusion  that  the  art  of 
Political  Economy,  according  to  Adam  Smith’s  use  of  the  term, 
cannot  be  completely  separated  fi-om  the  general  art  of  govern- 
ment. It  is  certainly  true  that  in  deciding  practical  questions 
of  public  finance — or  of  governmental  action,  in  matters  of 
industry  and  trade,  on  other  than  financial  grounds — it  is  often 
necessary  to  take  into  account  other  considerations  besides  the 
effects  of  the  proposed  measures  on  the  production  and  distri- 
bution of  wealth ; and  that  sometimes  these  other  considera- 
tions are  more  important  than  those  wth  which  Political 
Economy  is  concerned.  But  to  refuse  therefore  to  recognise  an 
art  of  Political  Economy  at  all,  even  as  a partially  distinct  branch 
of  a larger  whole,  was  a more  drastic  measure  than  these  argu- 
ments justified;  and  it  was  certainly  exposed  to  the  drawbacks 
involved  in  any  attempt  to  change  the  long-established  meaning 
of  a familiar  term.  To  tell  the  readers  of  Adam  Smith — for  the 
Wealth  of  Nations  has  never  ceased  to  be  widely  read  —that 
“ Political  Economy  has  nothing  to  do  \\dth  laisser  fairef  was  too 
daring  a paradox ; and  it  certainly  has  not  been  veiu'  successful 
in  dispelling  the  popular  confusion  between  theor}"  and  practice 
which  it  was  intended  to  clear  away.  The  “ laws  of  Political 
“Economy”  are  still  liable  to  be  “disobeyed”  in  the  ordinary 
discourse  even  of  well-educated  persons ; and  there  can  be  no 
doubt  that  the  interest  of  Adam  Smith’s  book  for  ordinarj- 
readers  is  largely  due  to  the  decisiveness  wdth  which  he  offers 
to  statesmen  the  kind  of  practical  counsels  which,  according  to 
Senior  and  Caimes,  he  ought  carefully  to  have  abstained  from 
giving ; pei’haps,  therefore,  in  view  of  long-established  usage,  it 
will  be  found  more  easy  to  avoid  any  confusion  between  “ laws  of 
“ nature  ” and  “ laws  of  human  legislation  ” in  relation  to  the 
production  and  distribution  of  wealth,  if  we  grant  the  study  of 
both  a place  within  the  pale  of  Political  Economy,  while  carefully 
distinguishing  the  Science  or  theoretical  branch  of  the  subject 
from  the  Art  or  practical  branch. 


CHAP.  II 


SCOPE  OF  POLITICAL  ECONOMY 


29 


§ 6.  And  this  conclusion  will  receive  further  support  if  we 
see  reason  to  regard  the  science  of  Political  Economy  as  only 
a partially  distinct  branch  of  the  general  science  of  Society,  just 
as  the  art  is  only  a partially  distinct  branch  of  the  general  art 
of  Government.  This,  no  doubt,  was  not  the  view  taken  b}' 
Senior,  Cairnes,  and  their  followers.  According  to  the  former, 
while  the  sciences  which  supply  the  rational  basis  for  the  art  of 
Government  have  premisses  dra^vn  from  an  infinite  variety  of 
phenomena,  the  premisses  of  the  science  of  Political  Economy 
consist  of  a very  few  general  propositions;  from  which,  as  he 
holds,  the  political  economist  can  draw  conclusions  universally 
true  in  respect  of  the  production  of  wealth,  and  as  regards  its 
distribution,  can  at  any  rate  “ lay  down  the  natural  state  of 
“ things  as  a general  rule,”  without  turning  his  attention  to  any 
elements  of  social  life  beyond  the  processes  of  producing  and 
exchanging  wealth.  The  scientific  value  of  such  deductive 
reasonings  will  be  considered  later;  what  we  have  now  to 
observe — a point  apparently  overlooked  by  Senior  and  Cairnes — 
is  that  the  practical  arguments  in  favour  of  the  “ system  of 
“ natural  liberty,”  urged  by  Adam  Smith  and  his  successors,  may 
similarly  be  presented  as  deductions  from  a few  premisses,  repre- 
senting familiar  facts  of  human  experience  and  not  requiring  any 
wide  study  of  social  phenomena.  Thus  it  may  be  argued,  first, 
that  from  the  universality  of  the  desire  for  wealth,  from  the 
superior  opportunities  that  each  individual  has,  as  compared 
with  any  other  person,  of  learning  what  conduces  best  to  the 
satisfaction  of  his  wants,  and  from  the  keener  concern  he  has  for 
such  satisfaction,  any  sane  adult  may  be  expected  to  discover 
and  aim  at  his  own  economic  interests  better  than  government 
will  do  this  for  him.  Then,  this  being  granted,  it  may  be  argued, 
secondly,  that  consumers  in  generaWthat  is,  the  members  of 
the  community  generally  in  the  character  of  consumers — seek- 
ing each  his  own  interest  intelligently,  will  cause  an  effectual 
demand  for  different  kinds  of  products  and  services,  in  propor- 
tion to  their  utility  to  society ; while  producers,  generally 
seeking  each  his  own  interest  intelligently,  will  be  led  to  supply 
this  demand  in  the  most  economic  way,  each  one  training  him- 
self or  being  trained  by  his  parents  for  the  best  rewarded,  and 
therefore  most  useful,  services  for  which  he  is  adapted.  Then, 
keeping  within  the  same  narrow  lines  of  analysis  and  deduction. 


30 


POLITICAL  ECONOMY 


IXTROD. 


we  may  shew  how  in  certain  cases,  such  as  that  of  industrial 
monopoly,  the  general  argument  for  the  coincidence  of  private 
interest  with  the  interest  of  the  community  fails.  All  these 
arguments  may  be  worked  out  in  considerable  detail,  without 
touching  on  any  social  facts  beyond  those  considered  in  the 
science  delineated  by  Senior — the  nature  of  wealth,  the  general 
causes  of  changes  in  the  value  of  purchaseable  commodities,  the 
universal  desire  to  obtain  such  commodities  at  the  least  possible 
sacrifice,  and  the  rational  activities  to  which  this  desire  may  be 
assumed  to  prompt  intelligent  persons  under  various  conditions. 

It  will  be  replied  that  this  kind  of  genei’al  reasoning  cannot 
by  itself  enable  us  to  solve  any  of  the  practical  problems  of 
economic  legislation ; because  such  problems,  as  Caimes  says, 
often  “ present  other  aspects  than  the  j^urely  economical — 
“ political,  moral,  educational,  artistic  aspects ; — and  these  may 
“ involve  consequences  so  weighty  as  to  turn  the  scale  against 
“purely  economic  solutions.”  In  saying,  however,  that  there 
are  “ few  ” practical  jJroblems  which  do  not  present  extra- 
economical  aspects,  Cairnes  seems  to  go  too  far;  since  there 
are  certainly  some  important  departments  of  economic  legisla- 
tion, e.g.,  banking  and  currency,  in  which  a statesman  would 
usually  come  to  his  conclusions  on  purely  economic  grounds.  Still 
no  doubt  his  statement  is  largely  true ; even  in  matters  of  tax- 
ation and  public  finance,  other  than  strictly  economic  aims  have 
often  to  be  taken  into  account, — for  instance,  the  actual  plan 
of  taxation  in  England  is  partly  determined  by  the  general  con- 
viction that  alcoholic  drinking  is  dangerous  to  health  and  morals. 

But,  granting  that  effects  not  strictly  economic  have  to  be 
taken  into  account  in  some  of  the  concrete  j^roblems  belonging 
to  the  practical  branch  of  Political  Economy,  it  is  no  less  true 
that  in  some  of  the  concrete  problems  of  economic  science 
causes  not  strictly  economic  cannot  be  overlooked.  Suppose, 
for  instance, — to  take  the  leading  question  of  the  Wealth  of 
Nations — we  compare  the  productiveness  of  the  labour  of  one 
country  at  the  present  time  ■with  that  of  another,  or  with  the 
productiveness  of  its  own  labour  at  an  earlier  period,  there  is 
no  one  of  the  extra-economical  elements*  of  social  bfe  mentioned 
by  Cairnes  which  may  not  come  into  consideration  ; political 
systems,  moral  opinions  and  habits,  educational  methods,  artistic 
faculties  and  tastes,  each  in  turn  may  become  important.  And 


CHAP.  II 


SCOPE  OF  POLITICAL  ECONOMY 


31 


no  general  rule  can  be  laid  down  as  to  the  extent  to  which 
these  other  elements  are  to  be  taken  into  account ; since  their 
relations  to  industry  and  trade  vary  indefinitely  in  closeness 
and  importance  in  different  economic  inquiries.  Thus,  in 
considering  generally  the  causes  of  the  improvement  in  the 
productive  powers  of  labour,  the  importance  of  a healthy  con- 
dition of  social  morality  must  not  be  overlooked ; but  it  is  not 
therefore  the  economist’s  duty  to  study  in  detail  the  doctrine 
or  discipline  of  the  different  Christian  churches : if,  however, 
we  are  studying  historically  the  causes  that  have  affected  the 
interest  of  capital,  the  views  of  Christian  theologians  with 
regard  to  usury  will  require  careful  attention.  So,  again,  the 
conditions  and  development  of  the  Fine  Arts  will  not  generally 
demand  more  than  a very  brief  and  summary  treatment  from 
the  economist:  if,  however,  we  are  investigating  the  share 
taken  by  a particular  community  in  the  international  organi- 
sation of  industry,  the  special  artistic  faculties  and  sensibilities 
of  its  members  may  become  a consideration  of  much  importance. 
Similarly  the  influence  exercised  on  industry  by  government 
has  often  been  an  economic  factor  of  the  first  magnitude : still 
it  is  obvious  that,  in  modern  European  communities,  at  the 
existing  stage  of  social  development,  changes  in  the  industrial 
organisation  of  the  civilised  part  of  mankind  are  largely  inde- 
pendent of  changes  in  their  political  organisation.  For  in- 
stance, in  the  nineteenth  century,  France  passed  from  Absolute 
Monarchy  to  Limited  Monarchy,  from  Limited  Monarchy  to 
Republic,  from  Republic  to  Empire,  and  from  Empire  to  Re- 
public again ; and  yet  none  of  these  changes — except  the  third 
during  a transient  crisis — appreciably  affected  its  industrial 
system ; whereas  this  latter  was  materially  modified  during 
the  same  period  by  causes  unconnected  with  politics,  such  as 
the  invention  of  railways  and  of  electric  telegraphs.  At  the 
same  time,  I should  quite  admit  that  most  English  economists 
a generation  ago  hardly  foresaw  the  extent  to  which  political 
conditions  would  continue  to  affect  industry  up  to  the  present 
date : and,  similarly,  the  relations  between  the  development  of 
industry  and  other  factors  of  social  life,  such  as  the  progress 
and  diffusion  of  knowledge,  and  the  changes  in  national  character 
or  in  the  habits  and  sentiments  of  special  classes,  have  hardly 
met  with  due  consideration. 


32 


POLITICAL  ECONOMY 


IXTROD. 


Granting,  however,  that  the  phenomena  with  which  Political 
Economy  is  concerned  cannot  be  satisfactorily  studied  in  complete 
separation  from  other  social  phenomena,  it  must  be  admitted, 
on  the  other  hand,  that  the  general  science  of  Society  is  only  in  a 
rudimentary  condition.  We  can  hardly  say  more  than  that  it  is 
slowly  struggling  into  existence,  and  what  relation  it  may  bear 
to  Political  Economy  when  it  comes  to  be  established,  it  would 
be  rash  to  prophesy.  There  can  be  no  doubt  that  the  general 
science  of  Society  will  include  economic  science  as  one  of  its 
branches ; and  it  is  probable  that  the  development  of  the 
general  science  will  bring  into  increasing  prominence  the  inter- 
dependence of  social  facts  of  various  kinds.  But  that  is  no 
reason  why  the  economic  aspects  of  social  facts  should  not 
continue  to  be  made  the  subject  of  special  study.  The  analogy 
of  other  sciences  may  be  appealed  to : for  although  the  progress 
of  science  continually  impresses  upon  us  the  coherence  and 
interdependence  of  the  laws  of  the  physical  world,  still  the 
steady  increase  of  knowledge  and  the  severe  limitation  of  the 
human  faculties  forces  on  us  a continually  greater  specialisation 
of  physical  study. 

I 7.  To  sum  up : Political  Economy,  as  commonly  studied, 
has  included  a theoretical  and  a practical  branch,  which  it  is 
impoi-tant  to  distinguish  clearly,  since  there  is  a popular  dis- 
position to  confound  their  respective  premisses  and  conclusions. 
For  brevity,  it  seems  convenient  to  refer  to  them  as  the  Science 
and  the  Art  of  Political  Economy;  the  latter  being  historically 
the  subject  to  which  the  term  was  mainly  applied  in  its  earlier 
use,  whereas  among  English  political  economists  from  the  be- 
ginning of  the  nineteenth  century  there  has  been  a tendency 
to  restrict  it  to  the  former.  The  science  of  Political  Economy 
deals  with  a certain  class  of  social  activities  and  relations,  the 
study  of  which  can  mth  advantage  be  partially  separated  from 
the  study  of  the  rest;  but  the  separation  is  only  partial, 
nibst  other  social  activities  having  an  economic  aspect,  as 
well  as  more  or  less  influence  on  the  activities  with  which 
Political  Economy  is  more  specially  concerned.  The  degree  of 
separation  between  the  science  of  Political  Economy  and  the 
general  science  of  Society  it  is  well  to  leave  somewhat  indefinite, 
partly  because  it  diffeis  considerably  in  different  inquiries,  partly 
because  the  general  science  of  Society  is  at  present  in  a rudi- 


CHAP.  II 


SCOPE  OF  POLITICAL  ECONOMY 


33 


mentaiy  condition  and  struggling  towards  a fuller  development; 
— each  step  in  which  is  not  unlikely  to  alter  somewhat  its 
actual  relations  to  the  special  sciences  which  are,  ideally  speak- 
ing, its  branches. 

Similarly  the  Art  of  Political  Economy,  which  deals  with  a 
jspecial  department  of  governmental  interference,  designed  to 
improve  either  the  social  production  of  wealth  or  its  distri- 
bution, may  be  partially,  but  only  partially,  separated  from 
the  general  art  of  legislation  or  government.  Here,  again, 
the  degree  of  separation  varies  considerably  according  to  the 
nature  of  the  problems  considered;  but  on  the  whole  the 
connexion  of  the  art  with  the  more  comprehensive  art  of 
which  it  is  a part  is  closer  than  the  corresponding  connexion 
in  the  case  of  the  science.  This  is  partly  due  to  the  fact 
that  the  general  art  of  Government,  though  its  development 
is  not  very  advanced,  has  hitherto  received  considerably  more 
attention  than  the  general  science  of  Society. 

In  the  present  treatise,  the  Ao-t  of  Political  Economy  is,  in 
accordance  with  the  view  expressed  above,  made  the  subject 
of  a separate  and  final  book^;  whilst  the  Science  of  Political 
Economy,  as  it  .is  ordinarily  conceived  in  England,  forms  the 
subject  of  the  first  two  books,  on  (1)  Production  and  (2)  Distri- 
bution and  Exchange,  respectively.  The  precise  manner  in 
which  I distinguish  and  connect  these  three  topics,  and  the 
grounds  on  which  I have  combined  the  theory  of  Exchange 
with  that  of  Distribution,  will  be  better  explained  somewhat 
later. 

Besides  the  subjects  above  mentioned,  economists  since  Say 

1 I have  already  explained  why  I do  not  hold  with  one  of  my  reviewers  that 
“the  art  of  political  economy  considered  as  a study  of  what  ought  to  be  is 
“ contained  in  the  science.”  It  is  of  course  true  that  the  examination  of  the 
effects  of  any  kind  of  governmental  interference,  either  on  production  or  on 
distribution  and  exchange,  may  be  treated  as  a problem  of  economic  science ; 
but  in  the  case  of  distribution  and  exchange,  as  I have  before  said,  it  is  clearly 
not  enough  for  practical  purposes  to  determine  what  kind  of  effects  on  incomes 
and  prices  will  be  produced  by  any  measure:  we  have  further  to  consider 
whether  these  effects  are  desirable  or  the  reverse.  On  this  latter  point  very 
different  views  are  explicitly  or  implicitly  maintained  by  thinkers,  statesmen, 
reformers,  philanthropists  of  different  schools:  a careful,  thorough,  and  im- 
pai-tial  examination  of  these  different  views  appeared  to  me,  when  I wrote  my 
book,  to  be  a great  desideratum : and  it  is  this  desideratum  which  I have  mainly 
endeavoured  to  supply  in  that  part  of  my  third  book  which  deals  with 
Distribution. 


S.  P.  E. 


3 


34 


POLITICAL  ECONOMY 


IXTROD. 


have  often  introduced,  as  a separate  department,  a discussion  of 
the  laws  of  Consumption;  and  the  indispensability  of  such  a 
discussion  has  been  strongly  urged  by  Jevons,  who  goes  the 
length  of  saying  that  “ the  whole  theory  of  Economy  depends 
“ upon  a correct  theory  of  Consumption.”  I quite  agree  wdth 
Jevons  as  to  the  fundamental  importance  of  certain  propositions 
relating  to  Consumption ; and  I also  think  that  their  importance 
has  not  been  adequately  apprehended  by  many  recent  %vriters. 
Still,  if  has  appeared  to  me  most  convenient,  in  such  a treatise 
as  the  present,  to  introduce  these  propositions  in  discussing  the 
questions  relating  to  Production,  Distribution,  and  Exchange 
which  they  help  to  elucidate ; and  I have,  therefore,  not  thought 
it  necessary  to  bring  them  together  under  a separate  head. 


CHAPTER  III. 

THE  METHOD  OF  ECONOMIC  SCIENCE. 

§ 1.  In  the  discussion  of  the  scope  of  Political  Economy  we 
have  had  to  anticipate  in  some  measure  the  discussion  of  its 
method,  since  the  two  questions  cannot  be  altogether  separated. 
We  now  pass  to  concentrate  attention  on  the  latter  question,  on 
which  express  differences  of  opinion  have  been  more  strongly 
accentuated.  Whether  the  method  of  political  economy  is 
“inductive”  or  “deductive,”  and  if  inductive,  how  far  it  is 
“ historical,”  and  whether  so  far  as  it  is  deductive  it  is  “ hypo- 
thetical ” or  “ positive,”  and  to  what  extent  its  more  exact 
reasonings  ought  to  assume  a mathematical  form — these  ques- 
tions have,  in  times  not  long  past,  given  rise  to  prolonged  and 
sometimes  bitter  controversy.  The  polemical  treatment  of  them, 
however,  in  England  at  least,  seems  lately  to  have  given  way  to 
a general  prevalence  of  a more  balanced  and  conciliatory  view ; 
and  in  fact  the  long  sustainment  of  the  controversy  seems  to 
have  been  due  partly  to  misunderstandings  and  confusions,  and 
partly  to  inadvertence  in  applying  to  the  whole  of  the  subject 
general  statements  that  are  only  true  of  some  of  the  reasonings 
included  in  it. 

The  most  fundamental  misunderstanding  appears  to  have 
arisen  from  a confusion  between  the  method  of  the  Science 
and  the  method  of  the  Art,  as  distinguished  in  the  preceding 
chapter.  Two  distinct  propositions,  one  being  important  as 
a premiss  in  the  deductive  reasonings  of  the  science,  the 
other  in  the  rationale  of  the  leading  rules  of  the  art,  have 
been  more  or  less  blended  together — under  some  such  name 
as  individualism  or  economic  egoism — or  at  any  rate  regarded 

3—2 


36 


POLITICAL  ECONOMY 


INTROD. 


as  logically  inseparable,  and  forming  part  of  one  doctrine. 
Whereas  in  reality,  though  there  is  a certain  affinity  between 
them,  there  is  no  sort  of  logical  connexion ; and  though  each  of 
them  is  only  true  with  important  limitations  and  qualifications, 
the  required  limitations  are  quite  different  in  the  two  cases. 
The  first  is  the  proposition,  stated  with  varying  amounts  of 
qualification,  that  the  “economic  man” — that  is,  the  human 
being  that  Political  Economy  assumes  to  be  normal — always 
prefers  a greater  apparent  gain  to  a less,  and  prefers  to  attain 
any  desired  result  with  the  least  possible  apparent  expenditure. 
The  second  is  the  proposition  that  the  • best  possible  result 
will  be  attained,  so  far  at  least  as  the  production  and  distribu- 
tion of  wealth  are  concerned,  if  the  individual  is  left  fi-ee  to 
regulate  his  own  activities  for  the  supply  of  his  own  wants, 
within  'the  limits  necessary  to  secure  a like  fi'eedom  to  all  other 
individuals.  It  is  obvious  that  the  second  proposition  does  not 
follow  from  the  first,  since  the  economic  individual  may  be  de- 
ceived by  appearances,  or  his  interests  may  clash  ■with  the 
interests  of  the  community.  It  is  obvious  too  that  they  belong 
to  entirely  different  departments  of  inquiry — the  first  gives 
information  as  to  what  happens,  mthout  pronouncing  whether 
it  is  good  or  bad;  the  second  judges  that  what  happens  or 
would  happen  under  certain  conditions  is  the  best  thing  that 
could  happen.  Accordingly  the  first  is  important  in  explaining 
scientifically  the  facts  of  economic  experience,  but  has  nothing 
to  do  ■with  economic  ideals  or  rules  of  governmental  action  in 
economic  matters ; while  the  second  leads  immediately  to  a 
fundamental  maxim  of  policy. 

Let  us  for  the  present  confine  our  attention  to  the  science. 
Here  the  primary  issue  of  importance  is  not  whether  the 
method  of  economic  science  is  purely  inductive  or  purely  de- 
ductive ; since  the  pre-vision  characteristic  of  science  necessarily 
involves  some  deduction,  while  the  artificially  simplified  Hyre 
of  human  action  and  social  r;elations,  vith  which  deductive 
reasoning  starts,  is  necessarily  formed  from  observation  and 
induction.  The  question  is  rather  whether  useful  results  are 
to  be  obtained  by  simple  deduction  from  propositions — like  the 
first  of  the  two  above  given — generalised,  -without  laborious  or 
systematic  induction,  from  familiar  facts  of  ordinary  experience. 
This  is  what  the  deductive  economists  contend ; and  perhaps  we 


CHAP,  in 


METHOD  OF  ECONOMIC  SCIENCE 


37 


may  say  that  the  contention  would  never  have  been  disputed  if 
it  had  been  limited  to  a certain  class  of  questions,  and  not  ap- , 
parently  put  forward  as  a compendious  account  of  the  whole 
method  of  economic  science.  As  so  put  forward,  it  is  contra- 
dicted by  the  continual  practice,  and  sometimes  by  the  express 
admissions,  of  the  most  deductive  economists. 

I 2.  No  economist,  for  example,  so  far  as  I am  aware,  has 
attempted  to  ascertain  the  “ causes  of  the  improvement  in  the 
“productive  powers  of  labour”  by  a method  purely — or  even 
mainly — a priori  and  unhistorical.  A certain  amount  of  de- 
ductive reasoning,  no  doubt,  has  commonly  been  introduced 
into  this  investigation ; but  this  seems  inevitable.  In  par- 
ticular, we  require  for  the  comprehension  of  economic  facts 
some  interpretation  of  the  motives  of  human  agents ; and 
this  has  necessarily  to  be  supplied,  to  a large  extent,  from 
our  general  knowledge^  of  human  nature — modified,  of  course, 
by  any  special  knowledge  that  we  may  be  able  to  gain  as  to 
the  peculiar  mental  characteristics  of  the  class  of  persons  whom 
we  are  considering.  But  in  the  general  analysis  of  the  condi- 
tions favourable  to  effective  production,  which  Mill  and  other 
writers  who  have  followed  him  have  given  in  the  first  part  of 
their  exposition,  the  deductive  element  has  always  been  quite 
subordinate;  and  so  far  as  the  method  adopted  is  different 
from  what  would  ordinarily  be  called  ‘ inductive,’  it  is  not 
because  it  is  in  any  sense  an  a priori  method;  but  because 
it  chiefly  consists  in  getting  a clearer  and  more  systematic 
view,  through  reflective  analysis,  of  general  facts  which  common 
experience  has  already  made  familiar^. 

^ How  far  this  general  knowledge  is  itself  acquired  by  induction  of  some 
sort  is  not,  of  course,  the  question.  As  Mill  explains,  in  his  Essay  on  “ the 
Definition  and  Method  of  Political  Economy  ” in  his  Essays  on  some  Unsettled 
Questions  in  Political  Economy,  the  economic  “method  a priori”  is  not  a “mode 
of  philosophising  “which  does  not  profess  to  be  founded  on  experience  at  all”; 
but  is  merely  distinguished  from  the  “ method  a posteriori  ” by  not  requiring, 
as  the  basis  of  its  conclusions,  specific  experience  of  economic  facts. 

* Thus,  when  Mill  in  his  first  six  chapters  states  the  requisites  of  production 
to  be  labour,  capital,  and  natural  agents ; when  he  defines  the  notion  of  labour, 
considers  its  relation  to  the  natural  agents  on  which  it  operates,  and  classifies 
the  different  kinds  of  labour  and  the  different  species  of  utility  produced  by  it ; 
when  he  makes  clear  the  notion  of  capital,  as  wealth  diverted  from  the  purpose 
of  directly  satisfying  its  owner’s  needs,  and  employed,  whether  in  the  form  of 
instruments  or  labourers’  necessaries,  in  producing  other  wealth ; when  he 


38 


POLITICAL  ECONOMY 


INTROD. 


§ 3.  Hence  when  the  method  of  Political  Economy  is  de- 
scribed as  essentially  deductive,  it  must  be,  not  the  theory  of 
Production,  but  the  theory  of  Distribution  and  Exchange,  that 
is  had  in  view : and  primarily  that  portion  of  this  latter  subject 
which  Mill  distinguishes  as  “ statical  ” and  not  “ dynamical  ” * — 
that  is,  that  which  treats  of  the  determination  of  the  reward  of 
services  and  the  value  of  products  in  the  existing  condition  of 
industry.  This  is  the  part  of  the  subject  to  which,  since 
Ricardo,  the  attention  of  economic  theorists  has  been  chiefly 
directed  (though  they  have  often  not  distinguished  it  clearly 
from  other  parts) : and  it  is  easy  to  shew  how  a method  largely 
dilferent  from  that  adopted  in  treating  the  question  of  Produc- 
tion naturally  suggests  itself  here.  The  broad  and  striking  fact 

points  out  how  capital  is  continually  consumed  and  reproduced,  but  with 
various  degrees  of  rapidity,  according  as  it  is  fixed  or  circulating ; — it  is  obvious 
that  all  these  results,  however  interesting,  are  obtained  by  merely  analysing 
and  systematising  our  common  empirical  knowledge  of  the  facts  of  industry. 
Similarly,  when  he  goes  on  to  consider  the  conditions  on  which  the  degree  of 
productiveness  of  diSerent  productive  agents  depends,  his  method  is  again 
merely  that  of  comparing  and  generalising  from  observed  facts.  Thus  he 
studies  quite  a posteriori  the  differences  in  the  natural  advantages  of  different 
countries ; the  differences  among  human  beings  in  habits  of  energetic  work,  in 
capacity  of  exertion  for  distant  objects,  in  keenness  of  desire  for  wealth,  and  in 
other  intellectual  and  moral  qualities ; and  the  differences  in  the  security 
afforded  “by  government,  and  against  government”  at  different  times  and 
places.  So  further,  in  the  discussion  of  the  advantages  of  division  of  labour, 
and  in  the  comparison  of  production  on  a small  scale  with  production  on  a 
large  scale,  his  argument  though  partly  deductive  still  relies  greatly  on  specific 
experience.  Then  again,  when  he  states  the  law  of  the  increase  of  labour,  the 
causes  that  actually  counteract  the  capacity  of  increasing  population  inherent  in 
human  beings,  and  the  extent  of  their  operation,  are  investigated  inductively 
(chapter  x.) ; and  so  are  the  actual  variations  in  the  “effective  desire  of 
“accumulation”  which  causes  the  increase  of  capital  (chapter  xi. ).  In  both 
these  cases  we  could,  no  doubt,  without  conscious  induction,  lay  down  certain 
incontrovertible  abstract  propositions;  but  in  the  former  case  we  should  hardly 
get  beyond  the  truths  of  elementary  arithmetic,  and  in  the  latter  case  we  should 
hardly  get  beyond  such  trivial  maxims  as  that  “wealth  is  increased  by  industry 
“and  thrift,”  &c. 

These  details  are  given,  not  with  the  object  of  laying  stress  on  Mill’s 
authority,  but  because  none  of  the  “orthodox”  critics  of  his  widely-read  book 
have  ever  attacked  his  general  method  of  treating  the  theory  of  Production. 
What,  therefore,  we  have  to  remark  is  not  merely  that  Mill’s  treatment  of  this 
part  of  his  subject  is  mainly  inductive  and  analytical;  but  that  it  never  seems  to 
have  occurred  to  any  “a  priori”  economist  that  it  ought  to  have  been  different. 

1 I ought  perhaps  to  say  that  I do  not  regard  as  satisfactory  either  the  line 
that  Mill  draws  by  means  of  this  pair  of  terms,  or  his  manner  of  treating 
the  questions  that  he  distinguishes  as  “dynamical.” 


CHAP.  Ill 


METHOD  OF  ECONOMIC  SCIENCE 


39 


which  originally  led  and  still  leads  reflective  minds  to  discuss 
the  question  “ how  a nation  is  made  wealthy  ” is  the  vast  differ- 
ence between  the  amounts  of  wealth  possessed  by  different 
nations  and  by  the  same  nation  at  different  periods  of  its 
history ; especially  the  great  increase  in  the  most  recent  times, 
in  consequence  of  what  we  speak  of  vaguely  as  “advance  of 
“ civilisation,”  “ progress  of  arts  and  sciences,”  “ development  of 
“trade  and  commerce,”  &c.  Hence  in  our  method  of  dealing 
with  this  question  induction  from  historical  facts  is  naturally 
prominent;  though  a certain  amount  of  deduction  inevitably 
comes  in  when  we  analyse  the  combined  play  of  the  forces  of 
economic  change  whose  effects  history  presents  to  us.  And  we 
may,  of  course,  examine  the  phenomena  of  Distribution  from 
the  same  point  of  view  of  Comparative  Plutology ; we  may  ask 
why  the  share  of  wealth  annually  obtained  by  an  English  miner 
is  larger  than  that  obtained  by  a German  miner,  or  why  English 
landowners  now  obtain  higher  rents  than  they  did  100  years 
ago : and  if  in  our  answers  we  “ include,  directly  or  remotely, 
“the  operation  of  all  the  causes”  that  have  combined  in  causing 
the  differences  investigated,  it  seems  evident  that  our  method 
of  investigation  must  be — just  as  in  the  case  of  Production — 
a primarily  inductive  and  historical  one.  We  shall  have  to 
note  and  explain  differences  and  changes  in  national  character 
generally,  in  the  habitual  energy,  enterprise,  and  thrift  of 
special  classes,  in  law  and  administration  and  other  political 
circumstances,  in  the  state  of  knowledge,  the  state  of  general 
and  special  education,  and  other  social  facts ; and  in  this  ex- 
planation the  “ method  a priori  ” can  evidently  occupy  but  a 
very  subordinate  place. 

But  such  questions  are  not,  I think,  those  which  most  ob- 
viously suggest  themselves  in  connexion  with  the  phenomena 
of  distribution.  Here  the  broad  and  striking  fact,  that  at  once 
troubles  the  sympathy  and  stirs  the  curiosity  of  reflective 
persons,  is  the  great  difference  between  the  shares  of  different 
members  of  the  same  society  at  the  same  time.  Thus  what 
economists  have  been  primarily  concerned  to  explain  is  how 
the  complicated  division  of  the  produce  of  industry  among  the 
different  classes  of  persons  who  have  co-operated  to  produce  it  is 
actually  determined  here  and  now ; and  what  is  likely  to  be  the 
effect  of  any  particular  change  that  may  occur  in  the  deter- 


40 


POLITICAL  ECONOMY 


INTEOD. 


mining  conditions,  while  the  general  state  of  things  remains 
substantially  the  same.  Similarly  as  regards  the  phenomena  of 
exchange,  the  most  natural  and  obvious  question  is  why  each 
of  the  vast  number  of  articles  that  make  up  what  in  the  aggre- 
gate we  call  wealth  is  exchanged  and  estimated  at  its  present 
price ; and  how  far  any  particular  event,  other  things  remaining 
the  same,  would  tend  to  raise  or  lower  its  price. 

It  is  in  answering  these  questions  that  the  general  theory  of 
Political  Economy,  as  commonly  treated,  uses  mainly  an  abstract, 
deductive,  and  hypothetical  method.  That  is,  it  considers  the 
general  laws  governing  the  determination  of  remunerations  and 
prices,  in  a state  of  things  taken  as  the  type  to  which  modem 
civilised  society  generally  approximates,  in  which  freedom  of 
exchange  and  freedom  in  choice  of  calling  and  domicile  are 
supposed  to  be — broadly  speaking — complete  within  a certain 
range,  and  in  which  the  natures  and  relations  of  the  human 
beings  composing  the  industrial  organisation  are  supposed  to 
be  simpler  and  more  uniform  than  is  actually  the  case  in  any 
known  community.  By  means  of  this  simplification  and  the 
group  of  assumptions  which  it  involves,  we  may  deductively 
work  out  a general  or  typical  account  of  the  manner  in  which 
the  prices  of  commodities  and  the  shares  of  different  classes  of 
producers  in  a modem  industrial  community  are  determined ; 
and  we  may  solve  more  precisely  particular  problems  of  a 
hypothetical  kind  relating  to  distribution  and  exchange.  It 
is  obvious,  however,  that  the  results  thus  obtained  do  not  by 
themselves  enable  us  accurately  to  interpret  or  predict  concrete 
economic  phenomena,  and  that  before  our  conclusions  can  be 
effectively  applied  for  these  purposes,  further  knowledge  ob- 
tainable only  by  induction  is  required.  When  we  try,  for 
example,  to  explain  the  changes  in  prices,  general  and  par- 
ticular, during  the  last  twenty  years,  or  the  fall  in  the  rate 
of  interest,  or  the  differences  of  wages  in  the  same  employ- 
ment in  different  parts  of  England,  or  the  differences  of 
wages  or  profits  in  different  employments,  it  is  at  once 
evident  that  the  aid  of  systematic  observation  and  induction 
is  essential. 

It  is  evident,  further,  that  the  general  applicability  and 
utility  of  hypothetical  reasonings  of  the  kind  described  above 
will  depend  largely  on  two  conditions : first,  on  the  degree  of 


CHAP.  Ill 


METHOD  OF  ECONOMIC  SCIENCE 


41 


success  attained  in  forming  our  original  suppositions,  so  that 
they  may  correspond  as  closely  as  possible  to  the  facts,  without 
becoming  unmanageably  complex ; and,  secondly,  on  the  extent 
to  which  we  recognise  and  attend  to  the  divergence  from  facts 
which  is — in  most  cases — inevitable  in  such  abstract  reasonings, 
and  the  insight  and  skill  which  we  shew  in  conjecturing  roughly 
the  effect  of  modifying  causes  whose  operation  we  cannot  pre- 
cisely trace.  To  secure  success  in  either  of  these  respects  we 
require  an  accurate  knowledge  of  the  general  characteristics  of 
the  matter  with  which  we  are  dealing ; and  as  a rule  we  cannot 
obtain  this  knowledge  without  an  inductive  study  of  economic 
facts.  It  is  not  perhaps  necessary  that  the  deductive  and  in- 
ductive investigation  of  any  class  of  economic  phenomena 
should  always  be  carried  on  simultaneously,  or  even  by  the 
same  persons;  but  the  latter  is  certainly  an  indispensable 
supplement  to  the  former. 

§ 4.  To  illustrate  the  necessary  place  of  Induction  even  in 
connexion  with  the  ordinary  reasonings  of  the  deductive  Political 
Economy,  it  may  be  convenient  to  examine  briefly  the  funda- 
mental assumptions  of  the  latter.  The  first  and  most  funda- 
mental is  that,  in  a state  of  economic  freedom,  all  persons 
engaged  in  industry  will,  in  selling  or  lending  goods  or  con- 
tracting to  render  services,  endeavour,  other  things  being  equal, 
to  get  as  much  wealth  as  they  can  in  return  for  the  commodity 
they  offer.  This  is  often  more  briefly  expressed  by  saying  that 
Political  Economy  assumes  the  universality  and  unlimitedness 
of  the  desire  for  wealth.  Against  this  assumption  it  has  been 
urged  that  men  do  not,  for  the  most  part,  desire  wealth  in 
general,  but  this  or  that  particular  kind  of  wealth : in  fact,  that 
“the  desire  of  wealth  is  an  abstraction,  confounding  a great 
“ variety  of  different  and  heterogeneous  motives  which  have 
“ been  mistaken  for  a single  homogeneous  force  ” It  does  not, 
however,  appear  that  there  is  necessarily  any  such  mistake  as 
Mr  Cliffe  Leslie  here  supposes.  For  so  far  as  the  objects  of 
these  different  and  heterogeneous  desires  are,  through  the 
establishment  of  a current  medium  of  exchange,  exchangeable 
and  commensurable  in  value,  they  all  admit  of  being  regarded 
as  definite  quantities  of  one  thing — wealth ; and  it  is  just 
because  the  “ desire  of  wealth  ” may,  for  this  reason,  be  used 
^ Cliffe  Leslie,  Essays  in  Political  and  Moral  Philosophy,  p.  238. 


42 


POLITICAL  ECONOMY 


IXTROD. 


to  include  “all  the  needs,  appetites,  passions,  tastes,  aims,  and 
“ ideas  which  the  various  things  comprehended  under  the  wmrd 
“ wealth  satisfy,”  that  we  are  able  to  assume,  to  the  extent  re- 
quired in  deductive  Political  Economy,  its  practical  universality 
and  unlimitedness.  There  is  no  particular  species  of  wealth  of 
which  it  would  be  approximately  true  to  say  that  every  one 
desires  as  much  of  it  as  he  can  get.  But  there  is  no  class  of 
persons  engaged  in  industry  of  whom  it  cannot  be  said  -wdth 
approximate  truth  that  they  would  always  like  more  of  some 
kind  of  wealth  if  they  could  get  it  without  the  least  sacrifice. 
Even  the  richest  capitalists  and  landowners,  who  are  merely 
connected  with  industry  as  lenders  of  wealth,  are  found  to  have 
a desire  of  wealth  sufficiently  strong  to  prevent  them  from 
letting  indifferent  pei'sons  have  the  use  of  their  property  at  less 
than  the  market  rate. 

At  the  same  time  it  is  equally  true  that  there  are  other 
things  obtainable  by  labour,  besides  wealth,  which  mankind 
generally,  if  not  universally,  desire ; such  as  power,  and  reputa- 
tion : and  it  is  further  undeniable  that  men  are  largely  induced 
to  render  services  of  various  kinds  by  family  affection,  friend- 
ship, compassion,  national  and  local  patriotism,  and  other  kinds 
of  esprit  de  corps,  and  by  other  motives.  The  amount  of  unpaid 
work  that  is  done  from  such  motives,  in  modern  civilised  society, 
forms  a substantial  part  of  the  whole : and  political  economists 
are  perhaps  fairly  chargeable  with  an  omission  in  making  no 
express  reference  to  such  work — with  the  exception  of  the 
mutual  services  rendered  by  husbands  and  wives,  and  by  parents 
and  children.  It  is,  however,  to  be  said  that  services  altogether 
unremunerated  by  money  occupy  no  important  place  in  the 
organisation  of  industry : they  belong  chiefly  to  the  exercise  of 
governmental  or  literar}'  functions,  or  the  management  of 
property  (trust-funds),  or  to  some  part  of  that  complex  system 
of  eleemos}Tiary  labour  and  expenditure,  which  actually  supple- 
ments the  deficiencies  of  the  industrial  distribution.  And  so 
far  as  paid  services  are  concerned,  all  economists,  from  Adam 
Smith  dovTiwards,  have  recognised  the  operation  of  other 
motives — as,  for  instance,  the  love  of  reputation — as  a cause  of 
the  difference  of  remuneration  in  different  employments.  All, 
therefore,  that  they  have  explicitly  assumed  is  that,  othei'  things 
being  eqitnl,  a man  will  prefer  a larger  price  or  remuneration 


CHAP.  Ill 


METHOD  OF  ECONOMIC  SCIENCE 


43 


to  a smaller.  This  qualification  includes,  of  course,  sacrifices 
that  have  to  be  made,  as  well  as  desirable  things  that  may 
be  acquired.  Until  we  know,  however,  how  men  quantitatively 
compare  different  kinds  of  sacrifice  with  each  other  and  with 
the  prospect  of  additional  wealth,  we  cannot  get  much  further ; 
and  even  Senior,  who  may  be  regarded  as  affording  the  clearest 
example  in  England  of  the  extreme  deductive  view,  dwells  on 
the  “ diversity  ” that  “ exists  in  the  amount  and  the  kind  of  the 
“ sacrifice  which  different  individuals  will  encounter  in  the 
“ pursuit  of  wealth.”  “ These  differences,”  he  goes  on  to  say, 
“ form  some  of  the  principal  distinctions  in  individual  and 
“ national  character.”  But  if  so,  we  require  to  learn  from 
observation  and  induction  how  different  nations,  or  different 
classes  of  men  in  the  same  nation,  estimate  different  kinds  of 
sacrifice,  before  we  can  explain,  for  example,  how  wages  and 
profits  vary  in  different  employments  with,  as  Adam  Smith  ex- 
presses it,  “ the  ease  or  hardship,  the  cleanliness  or  dirtiness, 
“ the  honourableness  or  dishonourableness  of  the  employment.” 

Among  the  disagreeable  things  that  have  to  be  borne 
Labour  itself  generally  occupies  a prominent  place,  in  the 
view  of  the  deductive  economists.  Mill,  for  instance,  speaks 
of  “aversion  to  labour”  as  a “perpetually  antagonising  prin- 
“ ciple  ” to  the  desire  of  wealth ; and  it  has  been  customary 
to  attribute  to  it  an  equal  degree  of  universality;  it  being 
affirmed  not  merely  that  “ every  one  desires  to  obtain  as  much 
“ wealth  as  possible,”  but  that  he  also  desires  to  obtain  it  by 
“ the  least  possible  amount  of  labour.”  This  proposition,  how- 
ever, is  open  to  the  obvious  objection  that  many  persons  get 
more  happiness  out  of  their  work  than  they  do  out  of  a good 
deal  of  their  expenditure.  And  in  fact  it  is  not  necessary, 
in  ordinary  economic  reasonings  on  problems  of  distribution, 
to  assume  that  all  the  labourers  dislike  all  the  labour.  The 
assumption  ordinarily  required  is  merely  that  every  man  will 
exact  payment  for  his  work  if  he  can  get  it ; but  this  imme- 
diately follows  from  the  desire  of  wealth,  if  he  has  no  special 
inducement  for  performing  gratuitously  the  particular  work  in 
question;  since  the  fact  that  a man  likes  his  work  is  not  a 
reason  why  he  should  consent  to  do  it  for  nothing,  if  he  can  get 
something  that  he  desires  by  his  labour  h 

1 It  may  perhaps  be  urged  that  an  arei-sion  to  labour  must  at  any  rate  be 


44 


POLITICAL  ECONOMY 


INTBOD. 


At  the  same  time  it  is  no  doubt  important  in  justifying,  as 
against  cc“  munism,  the  existing  individualistic  organisation  of 
industry,  to  shew  that  men  in  general  are  not  likely  to  work — 
to  the  extent  required  for  the  satisfaction  of  the  wants  of 
society — without  the  powerful  motive  supplied  by  their  desire 
of  wealth  for  themselves  and  their  families.  And  certainly  we 
seem  able  to  infer,  from  observation  of  the  manner  in  which 
even  the  respectable  rich  employ  thoir  time,  that  no  import- 
ant part  of  the  labour  required  for  the  production  of  wealth 
is  likely  to  be  carried  on  to  an  adequate  extent,  with  ade- 
quate perseverance  throughout  the  day  and  from  day  to  day, 
by  such  beings  as  men  now  are,  except  under  the  influence 
of  some  motive  more  powerful  than  an  average  man’s  liking 
for  work.  Whether  any  communistic  scheme  can  be  expected 
to  supply  such  motives  adequately  is  a question  which  we  may 
afterwards  take  occasion  to  discuss.  Meanwhile,  for  ordinary 
economic  reasonings,  we  may  accept  the  proposition  “ that  every 
“ one  desires  as  much  wealth  as  possible  at  the  least  possible 
‘‘sacrifice,”  without  necessarily  adding  that  he  always  regards 
as  a sacrifice  the  labour  by  which  he  is  able  to  produce  or  earn 
wealth. 

From  this  fundamental  assumption  we  may  immediately 
infer  that,  so  far  as  freedom  of  contract  exists,  similar  exchanges 
will  be  made  on  approximately  similar  terms,  at  least  ■wdthin 
the  limits  of  the  same  market ; meaning  by  a market  ^ a body 
of  persons  in  such  commercial  relations  that  each  can  easily 
acquaint  himself  with  the  rates  at  which  certain  kinds  of  ex- 
changes of  goods  or  services  are  from  time  to  time  made  by  the 
others.  For  it  is  obvious  that,  if  A prefers  a gi'eater  gain  to  a 
smaller,  he  will  not  sell  his  goods  or  his  services  to  B at  a rate 
lower  than  that  which  he  thinks  he  could  obtain  from  C or  D, 

supposed  to  operate  at  the  point  at  which  the  labourer  leaves  off ; since  other- 
wise he  would  not  leave  off,  provided  he  could  obtain  any  object  of  desire  by 
continuing  to  work.  And,  no  doubt,  it  would  be  usually  safe  to  infer  that  at  the 
close  of  any  worker’s  daily  task  of  paid  labour  he  likes  such  labour  decidedly  less 
than  some  other  unremunerated  employment  of  his  time.  Still  the  argument  is 
not  conclusive : for  a man  may  cease  to  labour  merely  because  it  would  be  bad 
economy  of  his  powers  to  continue,  since  additional  work  to-day  would  cause  a 
more  than  proportionate  decrease  in  efficiency  for  work  hereafter.  I suppose 
that  this  explanation  would  be  frequently  true,  as  regards  the  higher  kinds  of 
intellectual  work. 

* Cf.  Jevons,  Theory  of  Political  Economy,  c.  rv.,  “ Definition  of  Market.” 


CHAP.  Ill 


METHOD  OF  ECONOMIC  SCIENCE 


45 


allowance  being  made  for  any  trouble,  expense,  or  other  sacri- 
fice that  he  would  incur  in  getting  the  more  favourable  terms. 
This  inference  is  often  broadly  expressed  by  the  statement  that 
“ where  there  is  open  competition,  two  prices  cannot  be  per- 
“ manently  maintained  in  one  market  for  the  same  commodity 
Such  a statement,  as  ordinarily  understood,  implies  that  the 
market-price  is  determined  by  the  unconcerted  action  of  indi- 
vidual exchangers.  We  have,  however,  no  ground  for  assuming 
d priori  that  the  uncontrolled  action  of  enlightened  persons 
seeking  each  his  own  greatest  pecuniary  gain  may  not  under 
certain  circumstances  result  in  a deliberate  combination  of 
sellers  or  buyers  to  dictate  terms  of  exchange.  And  I shall 
afterwards  shew  that  the  question  what  price  enlightened  self- 
interest  will  prompt  such  a combined  body  to  demand  is  not 
outside  the  range  of  the  deductive  method ; it  is  only  a special 
case  of  the  determination  of  the  value  of  a monopolised  article, 
which  may  be  made  the  subject  of  abstract  reasoning  as  suitably 
as  any  other  determination  of  value.  But  it  is  convenient  and 
customary  to  use  the  term  ‘ competition  ’ to  imply  the  absence 
of  such  combination ; and  I shall  so  use  it. 

The  operation  of  competition  above  described,  by  which  the 
terms  of  similar  exchanges  are  kept  approximately  similar, 
should  be  carefully  distinguished  fi-om  that  other  action  of 
competition,  by  which  certain  inequalities  in  the  remunera- 
tion of  dissimilar  services  tend  to  be  continually  removed, 
though  more  slowly  and  indirectly.  In  this  latter  case  we 
have  to  consider  the  influence  exercised  by  the  desire  of  wealth, 
and  the  knowledge  of  current  rates  of  remuneration,  not  on 
the  terms  of  particular  bargains,  but  on  men’s  choice  of — or 
adhesion  to — their  respective  trades  or  professions.  The  ex- 
istence of  this  influence  may  be  inferred  from  the  assumptions 
already  made,  as  immediately  and  cogently  as  the  influence  of 
competition  on  similar  exchanges.  That  is,  we  may  infer  that 
persons  considering  what  trade  or  profession  to  select  among 
those  open  to  them  will,  other  things  being  equal,  select  those 
that  they  (or  their  advisers)  believe  to  be  best  remunerated ; 

1 That  is,  two  prices  v/hich  professional  sellers  receive  from  buyers.  If  a 
dealer  is  both  seller  and  buyer  there  must  be  two  prices  if  he  is  to  make  a 
profit : the  difference  between  these  two  prices  may  be  small  in  a perfect 
market,  but  it  cannot  altogether  disappear. 


46 


POLITICAL  ECONOMY 


ISTROD. 


and  further  that  persons  will  leave  a badly  remunerated  trade 
when  they  think  that  they  can  obtain  elsewhere  a remuneration 
sufficiently  higher  to  compensate  for  the  trouble  and  annoyance 
— and  in  most  cases  extra  risk — involved  in  the  change. 

To  complete  our  list  of  the  assumptions  on  which  the  chief 
theorems  of  English  deductive  Political  Economy  are  based  we 
should  have  to  include  other  propositions  relating  to  several 
different  social  facts,  such  as  Population,  Agriculture,  and 
Government.  But  the  principles  of  competition  above  given 
are  certainly  the  chief  and  cardinal  axioms  of  deductive  eco- 
nomics : and  perhaps  they  will  serve  for  our  present  purpose. 
As  I have  stated  them,  they  seem  to  me  incontrovertibly 
legitimate  as  corresponding  broadly  to  the  facts  of  modem 
industrial  societies.  But  I see  no  adequate  ground  for  as- 
suming these  principles  d prion,  except  with  the  qualifications 
above  given ; and  as  so  qualified,  they  do  not  enable  us  con- 
fidently to  explain  or  predict  the  economic  phenomena  of  any 
actual  society  without  additional  data,  which  can  only  be  ob- 
tained by  induction.  We  may  affirm  d priori  that  men  mil 
prefer  a greater  gain  to  a less,  other  things  being  equal ; but 
we  can  draw  no  positive  inferences  from  this  without  ascer- 
taining how  far  other  things  are  equal : and  we  can  only  leam 
by  a careful  study  of  facts  the  force  of  the  other  motives  of 
which  all  economists  admit  the  existence  and  importance ; 
especially  of  the  powerful  but  unobtrusive  impulses  which  lead 
a man  to  do  what  other  people  do,  and  what  he  himself  has 
done  before.  Similarly  we  may  affirm  that  in  a perfectly 
organised  market,  in  which  the  terms  of  all  bargains  may  be 
ascertained  without  more  trouble  than  average  exchangers  are 
able  and  willing  to  take,  the  price  of  similar  commodities  will 
be  approximately  the  same,  allowance  being  made  for  the 
trouble  and  expense  of  conveying  the  commodity ; but  we  can 
only  leam  by  a study  of  facts  how  far  in  any  given  society  at 
any  given  time  the  conditions  of  sale  of  any  particular  commodity 
approximate  to  those  of  a perfectly  organised  market.  With 
what  degree  of  precision  the  required  knowledge  can  be  ob- 
tained, what  exertions,  intellectual  or  physical,  are  needed  to 
obtain  it,  what  the  probability  is  of  these  exertions  being  made 
by  average  sellers  or  buyers  of  the  commodity  in  question,  are 
all  points  that  can  only  be  determined  empirically.  So  again. 


CHAP.  Ill 


METHOD  OF  ECONOMIC  SCIENCE 


47 


it  may  be  granted  that  competition  tends  to  equalise  the 
remunerations,  so  far  as  they  are  known,  of  dissimilar  services, 
involving  equal  sacrifices  and  rendered  by  persons  with  equal 
natural  qualifications  and  opportunities.  But  before  we  can 
apply  this  principle  in  any  concrete  case,  we  have  obviously  to 
ascertain  how  the  different  persons  or  classes  of  persons  con- 
cerned estimate  particular  sacrifices,  and  what  their  qualifications 
and  opportunities  are;  that  is,  to  what  extent,  and  by  what  expen- 
diture of  time  and  means,  they  are  really  able  to  fit  themselves 
for  each  of  the  different  careers  that  they  are  legally  free  to  enter. 

§ 5.  Our  conclusion  is  that  almost  everywhere,  in  dealing 
with  particular  economic  questions  of  a concrete  character, 
systematic  induction  is  needed  for  the  exactest  possible  deter- 
mination of  data,  as  well  as  for  the  verification  of  conclusions. 
And  in  declaring  that  the  method  of  Political  Economy,  regarded 
as  a concrete  science,  is  necessarily  to  a great  extent  inductive, 
we  also  declare  that  it  is  necessarily  historical,  in  a wide  sense  of 
the  term ; for  the  facts  of  which  it  seeks  to  ascertain  the  empirical 
laws,  in  order  to  penetrate  their  causal  connexions,  are  facts  that 
belong  to  the  history  of  human  societies.  The  question  can  only 
be  how  far  the  history  to  be  studied  is  recent  or  remote.  Here, 
primd  facie,  we  should  distingi  sh  provinces  rather  than  methods 
of  inquiry.  There  can  be  no  doubt  that  the  whole  history  of 
human  society  presents  economic  phenomena,  the  investigation 
of  which,  with  a view  to  the  ascertainment  of  their  causes  and 
effects,  is  a legitimate  subject  of  scientific  curiosity;  the  eco- 
nomic historian,  so  far  as  he  is  scientific,  is  obviously  studying 
a branch  of  economic  science.  The  only  points  on  which  con- 
troversy can  arise  are  (1)  how  far  the  knowledge  of  recent 
economic  history,  or  the  methods  used  in  obtaining  such  know- 
ledge, are  necessary  or  useful  for  the  study  of  remote  economic 
history;  and  (2)  conversely,  how  far  the  study  of  remote 
economic  history  tends  to  throw  light  on  the  problems  of  the 
present  and  the  recent  past.  On  the  former  question  an  at- 
tractive modus  vivendi  between  the  extreme  historical  school 
and  the  deductive  economist  is  proposed  in  Bagehot’s  (post- 
humously published)  Economic  Studies  (1880).  According  to 
this  brilliant  and  penetrating  writer,  “ English  Political  Economy 
“ — the  abstract  science  outlined  by  Adam  Smith  and  constructed 
“by  Ricardo” — is  “only  applicable  to  a limited  and  peculiar  world”; 


48 


POLITICAL  ECONOMY 


INTBOD. 


it  may  be  defined  as  “ the  science  of  business,”  such  as  busiuess 
is  in  societies  of  “grown-up  competitive”  production  and  trade; 
a “ theory  of  commerce,  as  commerce  tends  to  be  more  and 
“ more  when  capital  increases  and  commerce  grows.”  It  certainly 
seems  clear  that  elaborate  deductive  reasonings  based  on  the 
easy  transferability  of  labour  and  capital  from  place  to  place 
and  from  employment  to  employment  are  primarily  applicable 
only  to  such  advanced  societies  as  Bagehot  has  in  view;  and  are 
only  useful — if  at  all — as  a preliminary  intellectual  exercise  to 
the  economic  historian  who  is  concerned  with  less  advanced 
communities.  But  this  hardly  justifies  us  in  adopting  the 
sharp  distinction  proposed  by  Bagehot  between  an  “ economic  ” 
and  a “ pre-economic  ” era ; or  at  any  rate  a thoroughly  “ pre- 
“ economic  ” society  may  with  almost  equal  justice  be  called 
“prehistoric.”  Any  society  that  has  a “history,”  in  the  ordinary 
sense,  has  arrived  at  the  stage  of  development  at  which  the 
analysis  that  economic  science  offers  of  the  fundamental  notions 
of  utility,  value,  wealth,  capital,  money,  of  the  vaiyingly  re- 
munerative employment  of  man’s  labour  on  his  physical  environ- 
ment, and  of  the  general  laws  determining  competitive  exchanges, 
must  be  at  any  rate  partially  applicable  to  it. 

However,  it  belongs  rather  to  the  historian  than  the  eco- 
nomist, according  to  the  ordinarily  recognised  division  of 
intellectual  labour,  to  decide  how  far  this  general  analysis  and 
any  abstract  reasoning  based  on  it  are  useful  for  his  inquiries. 
But  it  may  be  worth  while  to  point  out  to  the  more  aggressiv’e 
“ historicists  ” that  the  more  the  historian  establishes  the  inde- 
pendence of  his  own  study,  by  bringing  into  clear  view  the 
great  differences  between  the  economic  conditions  with  which 
we  are  familiar  and  those  of  earlier  ages,  the  more,  primd  fade, 
he  tends  to  establish  the  corresponding  independence  of  the 
economic  science  which,  pursued  with  a view  to  practice,  is 
primarily  concerned  to  understand  the  present.  The  more 
effectively,  for  example,  he  proves  that  modem  economic  ana- 
lysis, and  deductions  based  on  the  assumption  of  free  compe- 
tition and  mobility  of  labour,  are  inapplicable  to  the  study  of 
mediaeval  history,  the  more  improbable  he  makes  it  that  the 
study  of  mediaeval  history  has  any  important  Light  to  throw  on 
the  economic  problems  of  modem  communities  in  the  most 
advanced  stage  of  development. 


CHAP.  Ill 


METHOD  OF  ECONOMIC  SCIENCE 


49 


Taking  now  the  point  of  view  of  the  economist  whose 
primary  task  is  to  understand  the  phenomena  of  his  own  age, 
we  may  perhaps  reduce  the  area  of  controversy  by  pointing  out 
that  the  question,  how  far  knowledge  of  the  past  is  important 
for  a scientific  grasp  of  the  present,  is  one  that  will  primd  facie 
receive  a different  answer  in  relation  to  different  inquiries.  In 
the  first  place,  it  may  be  noted  that  some  economic  proposi- 
tions— usually  of  a general  and  elementary  kind — while  true  in 
all  stages  of  economic  development,  still  find  their  most  im- 
pressive verifications  in  stages  antecedent  to  our  own.  For 
instance,  the  effect  on  price  of  a deficiency  in  the  supply  of 
a necessary  of  life,  which  modern  cosmopolitan  commerce  tends 
to  confine  within  narrow  limits,  is  most  strikingly  manifested 
by  the  dearths  of  the  middle  ages.  So  again,  the  great  epi- 
demics of  the  same  period,  especially  the  so-called  Black  Death, 
similarly  illustrate  the  power  of  a deficiency  in  the  supply  of 
labour  to  raise  its  value ; and  the  latter  example  is  all  the  more 
interesting  because  of  the  barriers  of  law  and  custom  through 
which  competition  had  to  force  its  way.  Even  in  dealing  with 
modem  questions  of  a more  special  kind,  the  most  impressive 
evidence  may  often  be  obtained  by  a retrospect  considerably 
extended,  though  not  usually  so  far  as  in  the  cases  just  men- 
tioned. Thus  it  may  be  hoped  that  no  modern  state  will  again 
give  such  an  object  lesson  in  the  dangers  of  an  inconvertible 
paper  currency  as  both  France  and  North  America  provided  in' 
the  last  quarter  of  the  eighteenth  century;  and  it  may  be  hoped 
also  that  the  English  student  will  always  have  to  turn  to  the 
first  quarter  of  the  nineteenth  for  a full  exhibition,  in  his  own 
history,  of  the  evils  of  an  unguarded  legal  right  to  poor-relief 
The  instances  above  given  are  all  useful  to  the  student  of 
the  economics  of  advanced  communities.  But  human  societies 
are  actually  coexisting  in  different  stages  of  economic  develop- 
ment ; and  concrete  economic  science,  even  if  pursued  with 
practical  ends,  cannot  exclude  from  its  view  the  economic 
phenomena  of  the  less  advanced;  and  for  these,  instructive 
analogies  are  still  more  likely  to  be  obtained  from  the  past 
history  of  societies  now  in  the  latest  stage.  Thus  competent 
judges  hold  that  it  might  have  prevented  serious  mistakes  in 
our  government  of  India,  if  the  governing  statesmen  had  had 
before  their  minds  the  historical  development  of  land-tenure,  as 
we  now  conceive  it  to  have  taken  place  in  European  countries. 

s.  P.  E. 


50 


POLITICAL  ECONOMY 


INTROD. 


So  far  we  have  considered  the  relation  of  the  science  of 
Political  Economy  to  economic  history  regarded  as  a special 
branch  of  the  whole  historical  study  of  human  society, — a branch 
which,  in  the  division  of  intellectual  labour  that  the  progress 
of  knowledge  renders  increasingly  necessary,  has,  in  the  last 
generation,  attained  a degree  of  practical  independence  re- 
sembling, for  example,  that  of  ecclesiastical  history.  But  some 
of  those  who  have  from  time  to  time  during  the  last  century 
announced  the  proximate  triumjjh  of  Histor}'  over  the  old- 
fashioned  Political  Economy  have  rather  had  in  view  the 
general  study  of  human  society  as  a whole,  treated  historically, 
as  the  study  of  a process  of  development.  It  is  held  that  a 
scientific  knowledge  of  the  fundamental  laws  of  this  develop- 
ment will  enable  us  to  predict  in  outline  the  future  histor}-  of 
society;  and  that  such  a general  forecast  must  be  more  reliable, 
even  as  regards  future  economic  conditions,  than  any  pre- 
dictions founded  on  a study  of  economic  phenomena  alone. 
There  is  much  to  be  said  for  this  contention,  on  the  supposition 
that  adequate  scientific  knowledge  of  social  development  has 
been  attained.  But  in  the  present  condition  of  the  general 
science  of  Society,  the  controversy  between  sociologists  and 
economists  is  rather  like  certain  disputes  between  European 
nations  for  the  possession  of  African  territor}-;  since  it  does  not 
seem  to  relate  to  any  region  effectively  occupied  and  cultivated 
by  either  science,  but  to  a far-reaching  “ hinterland  ” which  it  is 
hoped  to  occupy  and  cultivate  hereafter. 

§ 6.  The  limitations  to  the  use  of  the  deductive  method  in 
Political  Economy  which  have  been  indicated  above  appear  to 
me  obvious  and  incontrovertible : and  I have  endeavoured 
always  to  keep  them  in  view  throughout  the  discussion  of 
the  laws  of  Distribution  in  Book  II.  I must  admit,  however, 
that  they  have  not  always  been  duly  recognised  by  deductive 
economists,  who  have  in  consequence  been  led  to  make 
somewhat  too  sweeping  assumptions  as  to  concrete  facts.  I 
think  that  v-riters  of  the  opposite  school  have  done  good 
service  in  criticising  these  assertions,  and  the  confident  and 
dogmatic  tone  in  which  they  have  been  enunciated.  But  I 
cannot  accept  the  conclusion,  which  some  of  them  have 
proceeded  to  draw,  that  the  traditional  method  of  English 
Political  Economy  is  essentiall}-  faulty  and  misleading.  I quite 
admit  that  the  direct  utility  of  the  deductive  method,  as  a 


CHAP.  Ill 


METHOD  OF  ECONOMIC  SCIENCE 


51 


means  of  interpreting  and  explaining  concrete  facts — though 
not  its  validity,  so  long  as  it  is  regarded  as  merely  abstract  and 
hypothetical — depends  on  its  being  used  with  as  full  knowledge 
as  possible  of  the  results  of  observation  and  induction.  But  its 
indirect  utility,  as  a means  of  training  the  intellect  in  the  kind 
of  reasoning  required  for  dealing  with  concrete  economic  prob- 
lems, depends  to  a far  less  degree  on  such  empirical  knowledge ; 
and  I cannot  see  that  this  indirect  utility  is  materially  affected 
by  any  divergences  that  have  been  shewn  to  exist  between  the 
premisses  of  current  deductions  and  the  actual  facts  of  industry,. 
On  the  other  hand,  I think  that  both  the  validity  and  the 
utility  of  the  current  deductions  have  been  somewhat  impaired 
by  a want  of  thorough  explicitness  as  to  the  assumptions  on 
which  these  reasonings  depend,  and  by  a want  of  clearness  in  the 
cardinal  notions  employed  in  them.  In  order  to  guard  against 
this  latter  defect,  I have  been  led  to  perform  with  rather  unusual 
elaborateness  the  task  of  defining  the  cardinal  terms  of  Political 
Economy.  The  precise  advantages  that  I have  hoped  to  gain  by 
this  are  explained  in  the  second  chapter  of  the  following  book, 
in  which  the  task  is  commenced ; and  I trust  I shall  convince 
the  reader  that  the  process,  however  tedious,  is  absolutely 
indispensable  to  that  exact  treatment  of  economic  questions, 
to  which  alone  the  epithet  ‘scientific’  ought  to  be  applied. 

Here  I may  notice  a discussion  that  has  been  raised^  on  an 
issue  still  wider  than  that  debated  between  the  advocates  of  the 
“ a priori  ” economics,  and  the  inductive  or  “ realistic  ” school ; 
namely,  as  to  the  pretensions  of  Political  Economy  to  be  re- 
garded as  a science  at  all.  I certainly  think  the  language  some- 
times used  by  economic  writers,  suggesting  as  it  does  that  the 
doctrines  they  expound  are  entitled  in  respect  of  scientific 
perfection  to  rank  with  those  of  physics,  is  liable  to  be  seriously 
misleading.  But  I am  not  disposed  to  infer  from  this  that  we 
ought  deliberately  to  acquiesce  in  treating  Political  Economy 
unscientifically.  My  inference  would  rather  be,  not  that  we 
ought  not  to  aim  at  being  as  scientific  , as  we  can,  but  that  we 
ought  to  take  care  not  to  deceive  ourselves  as  to  the  extent  to 
which  we  have  actually  attained  our  aim : that,  for  instance,  so 
far  as  we  are  treating  Political  Economy  positively,  we  should 
avoid  mistaking  a generalisation  from  limited  experience  for  a 
universal  law;  and  so  far  as  we  are  treating  it  hypothetically, 
^ See  especially  Professor  Price’s  Practical  Political  Economy. 

4—2 


52 


POLITICAL  ECONOMY 


INTROD. 


we  should  take  care  not  to  use  words  in  different  meanings 
without  being  aware  of  the  difference,  nor  suppose  our  notions 
to  be  quantitatively  precise  when  they  are  really  indefinite. 
The  endeavour  to  be  scientific  in  this  sense  will  not  lead  to 
hasty  and  mistaken  dogmatism ; on  the  contrary,  it  will,  I hope, 
deliver  us  from  the  hasty  and  mistaken  dogmatism,  caused 
by  loose  and  confused  thinking,  to  which  ‘ common  sense  ’ or 
‘ natural  intelligence  ’ is  always  liable. 

§ 7.  A brief  reference  may  be  made  to  the  further  question 
how  far  the  method  of  Political  Economy  is  properly  mathe- 
matical. This  question  was  brought  into  special  prominence 
in  England  by  the  emphatic  affirmation  of  Jevons,  in  his  highly 
original  and  important  Theory  of  Political  Economy  (1871), 
that  “ economics,  if  it  is  to  be  a science  at  all,  must  be  a 
“ ‘ mathematical  science.’  ” In  a certain  sense  the  affirmation  is 
incontrovertible,  since  one  of  the  principal  aims  of  economic 
science  is  to  determine  the  relations  of  varying  quantities — 
e.g.,  to  ascertain  how  the  increase  of  the  quantity  of  capital  in 
a country  affects  rent  and  wages,  how  changes  in  the  quantity 
of  a commodity  demanded  at  a given  price  affect  its  actual 
price,  &c.  The  only  disputable  point  is  how  far  it  is  necessar}- 
or  expedient  to  represent  these  quantitative  relations  by  mathe- 
matical symbols  or  diagrams.  The  answer  must  obriously  var}^ 
to  a great  extent  with  the  complexity  of  the  reasoning  to  be 
represented.  Some  quantitative  deductions  are  so  simple  that 
it  would  be  pedantic  to  express  them  otherwise  than  in  ordi- 
nary English ; some  are  so  elaborate  that  it  would  be  a tour 
de  force  to  follow  them  without  the  aid  of  the  technical 
language  of  mathematicians.  Between  the  two  comes  an 
intermediate  class  of  reasonings  for  which  the  use  of  mathe- 
matical symbols  or  diagrams  is,  on  the  one  hand,  not  indis- 
pensable, while,  on  the  other  hand,  it  is  troublesome  to  persons 
who  have  not  had  a mathematical  training,  however  convenient 
it  may  be  for  those  who  have  had  such  a training.  If,  whilst 
giving  an  important  place  to  the  deductive  method,  I do  not 
adopt  a formally  mathematical  treatment  of  economic  problems, 
it  is  because  I am  of  opinion  that  the  deductions  really  useful, 
in  the  present  state  of  our  empirical  knowledge,  fall  within  this 
intermediate  class  in  respect  of  elaborateness  and  complexity. 


BOOK  L 


PRODUCTION. 


CHAPTER  I. 

THE  THEORY  OF  PRODUCTION. 

§ 1.  The  fundamental  question  with  which  we  shall  be 
concerned  in  the  present  Book  may  be  simply  stated  thus ; 
Under  what  conditions,  or  by  the  operation  of  what  laws, 
does  a society  become  more  or  less  wealthy  ? The  need  of 
a more  precise  definition  of  this  question,  and  the  proper 
mode  of  meeting  this  need,  will  be  explained  as  we  go  on ; 
at  the  outset  this  more  obvious  and  popular  statement  seems 
sufficient. 

In  considering  this  question  the  first  point  which  presents 
itself  is  the  difficulty  of  separating  the  study  of  Production 
from  the  study  of  Distribution  and  Exchange.  It  is  easily 
seen  that  the  kinds  of  wealth  produced  in  any  society  depend 
largely  on  the  manner  in  which  wealth  is  distributed  among 
the  members  of  the  society.  In  a community  where  there  is 
a large  middle  class,  there  will  probably  be  an  abundance  of 
cheap  luxuries ; while  where  there  are  only  a few  rich  persons 
among  a midtitude  of  poor,  we  shall  expect  to  find  a production 
mainly  of  necessaries,  with  a small  amount  of  costly  and  elabo- 
rate commodities.  Similarly,  distribution  cannot  fail  to  influ- 
ence the  amounts  of  wealth  produced ; since  both  the  nature 
and  the  intensity  of  the  motives,  that  normally  prompt  men 
either  to  labour  or  to  save,  vary  considerably  according  to  their 
position  in  the  scale  of  wealth  and  poverty.  The  precise  im- 
portance of  the  influence  thus  exercised  on  production  is  no 
doubt  hard  to  estimate.  Indeed  if  we  were  able  to  estimate  it 
exactly — if,  for  example,  we  could  tell  bow  far  the  improvement 


56 


POLITICAL  ECONOMY 


BOOK  I 


in  industrial  instruments  and  processes  would  go  on  as  at 
present,  if  the  inventors  and  managers  of  industry  had  not  the 
present  keen  spur  of  private  gain — the  controversy  between 
Socialists  and  Individualists  would  be  much  nearer  settlement 
than  it  is.  But  however  we  may  answer  such  questions  as  this, 
we  are  bound  to  take  note  of  the  effects  of  the  existing  distri- 
bution of  wealth,  as  supplying  to  the  different  classes  engaged 
in  production  the  stimulus  that  actually  prompts  the  energetic 
and  sustained  labour  and  the  extensive  outlay  of  wealth  for 
remote  results,  which  we  find  them  undertaking. 

None  the  less  does  it  seem  desirable  that  w'e  should  practise 
ourselves  in  contemplating  the  process  of  production  from  the 
point  of  view  of  a society  as  a whole,  abstracting  as  far  as 
possible  from  the  ‘adjustment  of  the  terms  of  co-operation’* 
among  producers ; so  that  the  total  gain  or  loss  in  wealth  re- 
sulting from  any  given  change  to  the  aggregate  of  human  beings 
concerned  may  be  habitually  distinguished  from  those  gains  and 
losses  of  individuals  and  classes  which  do  not  involve  changes  in 
the  wealth  of  the  society  as  a whole.  Normally,  no  doubt,  what 
is  productive  of  wealth  to  an  individual  tends  to  increase  the 
wealth  of  the  community  of  which  he  is  a part ; but  this  is  not 
always  the  case,  for  example,  a man  may  make  money  by  pro- 
moting a joint-stock  company  that  fails  ; and  even  when  the  two 
effects  are  combined,  they  may  be  combined  in  indefinitely 
varying  proportions.  And  to  confound  the  effect  of  any  cause 
on  the  wealth  of  a portion  of  a society  with  its  effect  on  the 
whole  wealth  of  the  society  is  one  of  the  commonest  forms  of 
error  in  popular  economic  discussion;  the  operation  of  a new 
law,  a tax,  a war,  or  other  important  social  event,  in  increasing 
or  diminishing  the  wealth  of  some  particular  class  of  persons, 
being  specially  striking  and  impressive,  attracts  the  attention  ot 
ordinary  observers  to  the  exclusion  of  all  other  effects.  Further, 
many  of  the  cardinal  notions  of  Political  Economy,  such  as 
Capital,  Profit,  Cost  of  Production — even  the  more  elementary 
notion  of  Wealth — are  naturally  conceived  somewhat  differently 
from  the  point  of  view  of  the  individual  and  from  that  of 
society ; and  it  is  important  to  recognise  clearly  this  doubleness 

* The  phrase  is  quoted  from  Hearn’s  Plutology.  I take  the  opportunity 
of  acknowledging  the  assistance  that  I have  derived  from  this  well-wntten  and 
instructive  work,  in  composing  the  present  portion  of  my  treatise. 


CHAP.  I 


THE  THEORY  OF  PRODUCTION 


57 


of  meaning,  so  as  to  guard  against  the  confusions  that  are  liable 
to  arise  out  of  it. 

Accordingly  I propose  in  the  present  Book  to  keep  as  con- 
sistently as  possible  to  the  social  view  of  industry.  We  shall 
consider  the  members  of  the  human  family  as  combining,  on 
certain  terms,  the  determination  of  which  we  do  not  at  present 
investigate,  in  the  work  of  adapting  their  material  environment 
to  their  joint  needs  and  uses;  we  shall  examine  the  circumstances 
that  have  been  favourable  or  adverse  to  this  combined  operation, 
and  try  to  forecast,  so  far  as  may  be,  the  prospect  of  greater  or 
less  success  in  it  hereafter.  We  must  take  notice  of  variations 
in  the  amounts  of  the  products  of  industry,  falling  to  the  lot 
respectively  of  the  different  classes  of  persons  who  have  com- 
bined, personally  or  by  lending  their  property,  to  produce 
them ; indeed  we  shall  have  to  consider  these  varying  shares 
from  two  distinct  points  of  view,  both  as  motives  to  labour  and 
saving,  and  as  means  to  the  efficient  performance  of  functions ; 
but  we  shall  not  yet  inquire  how  the  proportional  amount  of 
each  share  comes  to  be  neither  more  nor  less  than  it  is. 

§ 2.  But  whilst  I propose  to  separate  the  theory  of  Pro- 
duction, as  far  as  possible,  from  that  of  Distribution  and  Ex- 
change, there  is  one  fundamental  and  difficult  notion  of  which 
we  cannot  advantageously  postpone  the  discussion,  although  it 
may  seem  to  belong  rather  to  the  latter  department  than  to  the 
former.  This  is  the  notion  of  Value.  The  cardinal  question 
with  which  we  are  concerned  is  a quantitative  question,  in- 
volving a comparison  of  amounts  of  wealth ; and  it  is,  therefore, 
impossible  to  discuss  it  with  any  precision  of  thought  until  we 
have  settled  how  wealth  is  to  be  measured.  Now  undoubtedly, 
in  ordinary  thought  and  discourse,  wealth  is  measured  by  its 
value ; for  when  we  say  that  a man’s  wealth  is  increased,  we  do 
not  usually  mean  that  he  owns  more  matter,  but  that  what  he 
owns  is  more  valuable.  It  seems  accordingly  desirable,  in  order 
to  attain  a scientific  method  of  measuring  wealth,  to  begin 
by  examining  the  notion  of  Value  “ : and  then  to  attempt 
to  determine  the  notion  of  Wealth  so  far  as  is  needful  for 
the  purpose  of  the  present  inquiry.  The  examination  of 
these  two  fundamental  conceptions  occupies  the  two  following 

1 This  order  of  treatment  has  moreover  the  incidental  advantage  of  separating 
the  discussion  of  the  meaning  of  value  from  that  of  the  causes  of  value. 


58 


POLITICAL  ECONOMY 


BOOK  I 


chapters.  In  the  third  chapter  I proceed  to  what  I may  call  a 
‘ qualitative  analysis  ’ of  the  conditions  of  Production ; in  the 
course  of  which  the  relation  of  Capital  to  other  factors  of 
industrial  progress  comes  naturally  to  be  indicated.  But  to 
make  this  relation  quite  clear,  it  is  necessary  to  take  up  again 
the  task  of  definition  and  affix  a precise  meaning  to  the  term 
Capital.  Then  in  a concluding  chapter  I examine  how  far 
we  can  determine  the  general  laws  of  operation  of  the  causes 
on  which  the  increase  or  decrease  of  wealth  in  any  society  has 
been  found  to  depend. 


CHAPTER  II. 

THE  DEFINITION  AND  MEASURE  OF  VALUE. 

§ 1.  Before  attempting  to  make  the  common  notion  of 
value  clear  and  quantitatively  precise,  it  may  be  useful  to  explain 
my  general  view  of  the  work  of  definition,  which  will  occupy 
so  large  a space  in  this  part  of  my  treatise.  For,  in  spite 
of  all  that  has  been  written,  by  authors  of  deserved  repute, 
on  the  place  of  Definition  in  Economic  Science,  it  still  seems 
to  me  that  this  introductory  part  of  the  study  is  rarely  treated 
from  such  a point  of  view  as  would  enable  us  to  derive  the 
maximum  of  instruction  from  it.  The  economists  who  have 
given  most  attention  to  the  matter  seem  to  me  commonly  to 
fall  into  two  opposite  errors  at  the  same  time.  They  underrate 
the  importance  of  seeking  for  the  best  definition  of  each  car- 
dinal term,  and  they  overrate  the  importance  of  finding  it. 
The  truth  is, — as  most  readers  of  Plato  know,  only  it  is  a truth 
difficult  to  retain  and  apply, — that  what  we  gain  by  discussing 
a definition  is  often  but  slightly  represented  in  the  superior 
fitness  of  the  formula  that  we  ultimately  adopt ; it  consists 
chiefly  in  the  greater  ch  arness  and  fulness  in  which  the  cha- 
racteristics of  the  matter  to  which  the  formula  refers  have 
been  brought  before  the  mind  in  the  process  of  seeking  for  it. 
While  we  are  apparently  aiming  at  definitions  of  terms,  our 
attention  should  be  really  fixed  on  distinctions  and  relations  of 
fact.  These  latter  are  what  we  are  concerned  to  know,  con- 
template, and  as  far  as  possible  arrange  and  systematise ; and 
in  subjects  where  we  cannot  present  them  to  the  mind  in 
orderly  fulness  by  the  exercise  of  the  organs  of  sense,  there  is 


60 


POLITICAL  ECONOMY 


BOOK  I 


no  way  of  surveying  them  so  convenient  as  that  of  reflecting  on 
our  use  of  common  terms.  And  this  reflective  contemplation 
is  naturally  stimulated  by  the  effort  to  define ; but  when  the 
process  has  been  fully  performed,  when  the  distinctions  and 
relations  of  fact  have  been  clearly  apprehended,  the  final  ques- 
tion as  to  the  mode  in  which  they  should  be  represented  in 
a definition  is  really — what  the  whole  discussion  appears  to 
superficial  readers — a question  about  words  alone.  Hence  in 
comparing  different  definitions  our  aim  should  be  far  less  to 
decide  which  we  ought  to  adopt,  than  to  apprehend  and  duly 
consider  the  grounds  on  which  each  has  commended  itself  to 
reflective  minds.  We  shall  generally  find  that  each  writer 
has  noted  some  relation,  some  resemblance  or  difference, 
which  others  have  overlooked ; and  we  shall  gain  in  com- 
pleteness, and  often  in  precision,  of  view  by  following  him 
in  his  observations,  whether  or  not  we  follow  him  in  his  con- 
clusions. I may  observe  that  there  is  a natural  tendency  to 
estimate  the  results  of  intellectual,  as  of  other,  labour  in  pro- 
portion to  their  cost ; hence  the  more  difficulty  we  have  found 
in  drawing  a line  of  definition,  the  more  inclined  we  are  to 
emphasise  its  importance  when  once  drawn,  and  to  overlook  or 
underrate  the  points  of  resemblance  which  objects  excluded 
by  it  have  to  those  included.  Whereas  the  very  difficulty 
of  drawing  the  line  is  most  likely  due  to  the  importance  of 
these  points  of  resemblance ; and  instead  of  forgetting  them 
when  the  work  of  definition  has  been  performed  to  our  satis- 
faction, we  ought  to  take  special  pains  to  keep  them  before 
our  minds.  Often,  indeed,  we  have  to  admit  that — even  when 
a distinction  is  of  fundamental  importance — no  sharp  line  of 
definition  can  be  drawn,  owing  to  the  gradual  manner  in  which 
the  cases  near  the  line  shade  off  into  each  other. 

I have  said  that  in  the  work  of  definition,  the  final  ques- 
tion— the  point  which  we  directly  raise  and  settle — must  be 
merely  a question  as  to  the  use  of  words.  In  sajdng  this  I do 
not  at  all  mean  to  depreciate  its  importance,  or  to  justify  a 
careless  treatment  of  it.  No  doubt  if  our  view  of  the  subject 
is  tolerably  complete,  and  our  notions  clear  and  precise,  it  is  of 
secondary  importance  what  verbal  tools  we  use  in  reasoning,  so 
long  as  we  use  them  consistently ; but  this  secondary  import- 
ance is  sufficiently  great  to  claim  our  most  careful  consideration. 


CHAP.  II  DEFINITION  AND  MEASURE  OF  VALUE 


61 


There  seem  to  be  two  conditions  which  it  is  on  different  grounds 
desirable  that  a definition  should  satisfy  as  far  as  possible ; but 
we  should  bear  in  mind  that  we  frequently  cannot  completely 
satisfy  either — still  less  both  together.  In  the  first  place,  we 
should  keep  as  closely  as  we  can  to  the  common  use  of  lan- 
guage : otherwise  we  are  not  only  exposed  to  the  danger  of 
being  misunderstood  by  others,  through  the  force  of  habitual 
usage  overcoming  the  impression  produced  by  express  defini- 
tion ; but  we  further  run  serious  risk  of  being  inconsistent  with 
ourselves,  on  account  of  the  similar  effect  of  habit  on  our  own 
minds.  Secondly,  our  definitions  should  be  precisely  adapted 
to  the  doctrine  that  we  have  to  expound ; so  that  we  may  avoid 
as  far  as  possible  the  continual  use  of  qualifying  epithets  and 
phrases.  In  aiming  at  the  first  of  these  results,  we  should  not 
forget  that  common  usage  may  be  inconsistent ; on  the  other 
hand,  we  should  not  hastily  assume  that  this  is  the  case. 
Economists  have  sometimes  missed  the  useful  lessons  which 
common  thought  has  to  teach,  by  deciding  prematurely  that  a 
word  is  used  in  two  or  more  distinct  senses,  and  thus  omitting 
to  notice  the  common  link  of  meaning  that  connects  them. 
Still,  it  will  of  course  often  happen  that  we  cannot  fit  a word 
for  scientific  use  without  cutting  off  some  part  of  its  ordinary 
signification : hence  it  is  very  important  that  we  should  keep 
carefully  distinct  the  two  very  different  questions,  (1)  What  do 
we  commonly  mean  by  the  terms.  Value,  Wealth,  Capital, 
Money,  &c.  ? and  (2)  What  ought  we  to  mean  by  them — what 
meaning  is  it,  for  scientific  purposes,  convenient  to  attach  to 
them?  I think  that  a good  deal  of  unnecessary  controversy  has 
been  due  to  a want  of  clear  separation  between  these  two  very 
different  inquiries,  and  the  different  methods  of  discussion 
respectively  .“ippropriate  to  them.  It  seems  to  be  forgotten 
that  the  former  question  is  not  strictly  an  economic  question 
at  all,  but  a linguistic  one ; we  may  even  add  that  it  is  a lin- 
guistic question  which  those  who  are  most  acquainted  with 
economic  facts  find  themselves  least  able  to  solve  succinctly  and 
satisfactorily : since  in  attempting  to  give  to  common  terms  the 
precision  which  their  o^vn  view  of  the  facts  requires,  they  inevi- 
tably raise  questions  which  are  not  raised  in  ordinary  thought, 
and  to  which,  therefore,  it  is  illusory  to  suppose  that  common 
usage  gives  even  an  implicit  answer.  Again,  in  trying  to  adapt 


62 


POLITICAL  ECONOMY 


BOOK  I 


our  terms  to  scientific  purposes,  we  must  remember  that,  dealing 
as  we  are  with  facts  whose  relations  of  resemblance  and  differ- 
ence are  highly  complex,  we  may  often  require  to  classify  them 
somewhat  differently  for  the  purposes  of  different  inquiries ; 
and  that  hence  a definition  which  would  be  most  suitable 
for  one  investigation  will  require  some  modification  to  render 
it  convenient  for  another.  Economists  have  frequently  found 
this ; and  have  been  content  to  meet  the  difficulty  by  using  the 
same  word  with  slight  differences  of  meaning.  This  seems  to 
me  often  the  best  course  to  adopt,  provided  the  change  is  clearly- 
stated  and  kept  before  the  reader’s  mind.  I find,  however,  that 
even  careful  writers  have  been  too  much  inclined  to  slur  over 
the  differences  of  meaning,  and  keep  them  in  the  background, 
especially  when  they  are  not  considerable  in  amount ; a proce- 
dure which  dangerously  tends  to  encourage  looseness  of  thought. 

I have  spoken  once  or  twice  of  the  importance  of  making 
our  thought  precise.  I do  not  mean  that  we  should  necessarily 
aim  at  quantitative  exactness  in  all  our  statements  of  economic 
laws.  I quite  agree  with  the  witers  (such  as  Cairnes)  who 
have  warned  us  against  the  futility  of  such  an  aim.  But  the 
more  inevitable  it  is  that  our  conclusions  should  be  merely 
rough  and  approximate,  the  more  important  it  becomes  that  we 
should  be  thoroughly  aware  when  and  how  far  they  are  wanting 
in  exactness;  and  in  order  that  we  may  be  aware  of  this,  we 
should  make  our  conceptions  as  precise  as  possible,  even  when 
we  cannot  make  our  statements  so.  Only  in  this  way  can  we 
keep  before  our  minds  the  inadequacy  of  our  knowledge  of 
particulars  to  supply  answers  to  the  questions  which  our  general 
notions  lead  us  to  ask.  And  if,  as  is  sometimes  the  case,  even 
our  general  conceptions  cannot  be  reduced  to  perfect  exactness, 
it  is  still  desirable  that  we  should  know  why  this  is  the  case, 
and  what  obstacles  the  fact  presents  to  our  efforts  to  think 
precisely  about  it.  This  last  precaution  seems  to  me  to  have 
been  specially  neglected  by  economists.  Most  of  the  objects 
about  which  they  reason  are  conceived  as  possessing  definite 
quantity.  Yet,  for  example,  some  of  the  most  eminent  of  them’ 
have  not  always  seen  that  it  is  impossible  to  think  definitely  of 
the  quantity  of  any  aggregate  of  diverse  elements,  except  so  far 


* Cf.  post,  B.  II.  c.  ii. 


CHAP.  II  DEFINITION  AND  MEASURE  OF  VALUE 


63 


as  these  elements  admit  of  being  reduced  to  a common  quanti- 
tative standard ; and  that  unless  this  is  done,  when  we  speak  of 
such  an  aggregate  as  having  increased  or  decreased  in  amount, 
or  of  something  else  as  “ varying  in  proportion  to  ” it,  we  are 
using  words  to  which  there  are  necessarily  no  definite  thoughts 
corresponding. 

Bearing  in,  mind  then  these  general  considerations,  let  us 
attempt  to  deal  with  the  much  controverted  notion  of  Value 
upon  the  principles  above  laid  down. 

§ 2.  Economists  have  usually  followed  the  Physiocrats  in 
attributing  to  the  term  value  two  different  meanings,  utility 
and  power  of  purchasing.  The  distinction  thus  drawn  between 
“ Value  in  use  ” and  “ Value  in  exchange  ” is  certainly  im- 
portant ; but  the  account  usually  given  of  the  two  notions 
overlooks  the  connexion  between  them ; which  lies  in  the  com- 
parison of  alternatives  which  the  term  value  in  either  sense 
essentially  implies.  For  let  us  consider  what  we  mean  when 
we  speak  of  a man  setting  value  on,  or  attaching  value  to, 
things  to  which  the  idea  of  exchange  is  inapplicable — whether, 
this  inapplicability  be  due  to  circumstances  isolating  the  man, 
as,  for  instance,  if  we  think  of  Robinson  Crusoe  on  his  island ; 
or  to  the  fact  that  no  one  else  would  buy  the  things,  as  in 
the  case  of  old  letters  and  other  memorials,  knowledge  of 
various  kinds,  &c.  We  do  not,  I think,  mean  exactly  that 
the  things  are  useful  to  him ; though  no  doubt  they  are 
in  a certain  sense  useful,  that  is,  they  satisfy  or  prevent  some 
want  or  desire  which  is  or  would  be  felt  in  the  absence  of 
them*.  But  we  mean  that  the  man  would,  if  necessary,  give 
something  to  gain  them  or  prevent  their  destruction.  This 
something  may  be  some  useful  material  thing,  or  it  may  be 

* This  seems  to  be  the  accepted  meaning  of  the  terms  “useful,”  “utility,” 
&c.,  in  the  present  discussion.  It  is  not,  I think,  quite  convenient  to  say  with 
Professor  Jevons  that  ‘ useful  ’ is  that  which  gives  pleasure ; and  to  measure 
‘ utility,’  in  the  Benthamite  way,  by  the  balance  of  pleasurable  over  painful 
consequences.  For  prima  facie  there  are  many  valued  things — alcohol,  opium, 
&c. — which  not  only  have  an  actual  tendency  to  produce  a balance  of  paiuful  con- 
sequences to  their  consumers,  but  are  even  known  to  have  this  tendency  by  many 
of  the  persons  who  nevertheless  value  and  consume  them.  And  in  dealing  with 
the  determination  of  value  we  are  not  concerned — except  in  a very  indirect  way 
— with  these  painful  consequences ; what  we  are  concerned  with  is  the  intensity 
of  the  desire  or  demand  for  the  articles  in  question,  as  measured  by  the  amount 
of  other  things,  or  of  labour,  that  their  consumers  are  prepared  to  give  for  them. 


64 


POLITICAL  ECONOMY 


BOOK  I 


labour  of  some  kind;  the  general  notion  of  value  leaves  this 
quite  indefinite,  provided  only  the  giving  of  the  matter  or 
the  labour  would  not  occur  unless  there  was  something  to  be 
got  or  preserved  by  it.  All  that  it  distinctly  involves  is  the 
notion  of  something  else,  presented  as  a possible  alternative 
for  the  thing  valued. 

If  this,  then,  be  the  fundamental  conception  of  Value  when 
exchange  is  out  of  the  question,  it  does  not  seem  to  be  essen- 
tially altered  in  the  more  ordinary  case  when,  in  speaking  of 
the  value  of  a thing,  we  no  doubt  have  in  view  its  Exchange 
Value.  Only  in  this  latter  case  we  mean  that  other  'people 
would  give  something  for  the  article  in  question : that  if 
offered  for  sale  it  would  fetch  a price  in  the  market.  If  we 
only  wanted  a qualitative  definition  of  the  common  notion  of 
value,  we  need  not  press  our  inquiries  beyond  this;  we  need 
not  go  on  to  ask  'what  it  is  that  other  people  would  give  in 
exchange.  But  if  we  use  the  notion  quantitatively,  as  we  com- 
monly do,  and  as  we  require  to  do  for  the  purposes  of  economic 
science,  if,  for  example,  we  think  of  a thing  A as  having  more 
value  than  a thing  B,  we  must  mean  that  some  purchasers  will 
give  for  A more  of  a certain  kind  of  thing  than  any  purchaser 
would  give  for  B.  That  is,  we  require  a Standard  of  Value-. 
And  further,  if  we  make  our  quantitative  comparison  precise, 
and  think  of  one  thing  as  being,  for  example,  twice  as  valuable 
as  another,  we  commonly  imply  that  there  cannot  be  two  prices 
for  the  same  thing  at  the  same  time.  So  long  as  this  market 
is  thought  of  as  at  a particular  place  and  time,  the  conception  of 
a standard  of  value  presents  no  difficulty.  Ob\’iously,  any  thing 
we  choose  will  serve  for  a standard ; for  if  cloth,  for  example, 
will  sell  in  a perfect  market  for  more  of  any  one  thing  than 
linen  will,  it  will  sell  for  more  of  any  other  thing. 

But  a perplexity  arises  when  we  compare  the  values  of  the 
same  thing  at  different  times,  and  speak  of  things  increasing 
or  decreasing  in  value.  For  here  we  can  no  longer  take  any- 
thing we  like  as  a standard  of  value ; since  we  do  not  think  a 
thing  more  valuable  because  it  will  sell  for  more  of  something 
that  has  grown  cheaper.  When,  therefore  we  say  that  a thing 
has  risen  in  value,  what  exactly  do  we  mean  ? To  this  question 
one  of  two  answers  is  commonly  given;  either  (1)  that  the 
thing  will  sell  for  more  of  things  in  general,  or  (2)  that  it 


CHAP.  11  DEFINITION  AND  MEASURE  OF  VALUE 


65 


will  sell  for  more  of  something  which  itself  had  not  varied  in 
value.  Neither  of  these  answers  is  altogether  satisfactory.  The 
first  is  at  once  abstract  and  vague ; we  cannot  actually  exchange 
an  article  for  ‘ things  in  general  ’ ; and  it  is  not  easy  to  see  how 
we  can  state  its  value  in  terms  of  such  an  aggregate,  if  the 
elements  composing  the  aggregate  have  in  the  mean  time 
varied  in  value  relatively  to  each  other,  as  may  easily  be  the 
case.  The  second  answer  appears  to  avoid  this  difficulty ; but 
this  appearance  is  soon  dispelled.  For  reflection  shews  us 
that  the  notion  of  ‘ not  varying  in  value  ’ must  be  exactly  as 
hard  to  define  as  the  opposite  notion  of  ‘ varying  in  value.’ 
The  second  answer,  therefore,  still  leaves  us  asking  “ What  does 
“ variation  in  value  mean  and  how  is  it  to  be  measured  ? ” 

There  is,  however,  a mode  of  meeting  this  difficulty,  which 
is  given  in  perhaps  the  clearest  form  by  Cairnes'.  He  has 
no  doubt  that,  when  in  discussing  an  advance  in  the  price 
of  butcher’s  meat,  we  ask  whether  meat  has  risen  or  money 
fallen  in  value,  “ obviously  there  is  a tacit  reference  to  the 
“ causes  on  which  value  depends : and  the  question  really  raised 
“ is  not  strictly  as  to  the  change  in  the  exchange  value  of  meat 
“ and  money,  but  as  to  the  cause  or  causes  which  have  produced 
“ the  change.  If  we  believe  that  the  change  is  traceable  to 
“ a cause  primarily  affecting  meat,  we  say  that  meat  has  risen 
“ in  value,”  &c.  I cannot  agree  that  this  interpretation  of  the 
ordinary  notion  of  change  in  value  is  “ obviously  ” correct ; as 
I think  that  many  persons  would  speak  of  a thing  as  having 
fallen  in  value,  when  they  found  that  it  had  fallen  relatively  to 
all  other  things,  even  though  they  might  know  the  change  to 
be  due  to  causes  affecting  primarily  these  other  things^.  And 
I think  that  most  persons  would  find  it  difficult  to  distinguish 
clearly  the  causes  of  change  in  value  that  ‘ primarily  affect  ’ 
a particular  article  from  those  that  primarily  affect  other  things. 

* Some  Leading  Principles,  Faxt  I.  c.  i.  § 1.  Cf.  also  Mill,  Political  Economy, 
Book  III.  c.  I.  § 3. 

“ The  current  discussion  of  the  appreciation  of  gold  shews  that  there  is 
a disagreement  on  this  point  as  to  the  meaning  of  words  : for  some  disputants, 
admitting  that  the  general  purchasing  power  of  gold  has  increased,  affirm 
that  gold  has  not  ‘really  risen  in  value’  because  this  change  is  due  to  the 
improvements  which  have  enabled  other  things  to  be  produced  at  less  cost; 
while  others  mean  by  ‘ appreciation  ’ or  rise  in  value  the  admitted  increase  in 
general  purchasing  power,  and  consider  that  the  only  question  is  as  to  the 
causes  of  the  appreciation. 


S.  P.  E. 


5 


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POLITICAL  ECONOMY 


BOOK  r 


Take  the  common  case  of  a rise  in  price  due  to  an  intensifica- 
tion in  the  demand  for  an  article.  This  intensified  demand 
may  itself  be  caused  merely  by  an  increase  in  the  supply  of 
other  things ; as  when  society  growing  richer  wants  more  old 
silver  and  is  prepared  to  pay  more  for  it.  We  can  hardly  call 
such  a phenomenon  a “ cause  primarily  affecting  ” the  old 
silver;  yet  I think  we  should  commonly  say  that  old  silver 
had  risen  in  value  under  such  circumstances.  Suppose,  again, 
that  the  intensified  demand  were  due  merely  to  an  alteration  in 
social  habits,  without  any  increase  of  general  wealth ; still,  even 
in  this  case,  being  the  expression  of  an  increased  preference  for 
old  silver  as  compared  with  certain  other  luxuries,  it  is  the 
effect  of  a cause  simultaneously  affecting  these  other  articles. 

On  the  whole,  I think  that,  strictly  speaking,  the  “causes 
“ primarily  affecting  ” a thing  that  varies  in  exchange  value 
must  be  understood  to  be  causes  affecting  its  supply — if 
Cairnes’s  interpretation  of  “ change  in  value  ” is  to  have  any 
definite  significance.  Of  such  causes  the  most  important,  in 
the  case  of  most  articles,  is  a change  in  the  amount  of  labour 
required  for  producing  either  the  article  itself  or  the  instru- 
ments and  materials  employed  in  its  production.  In  this  way 
we  are  led  to  Ricardo’s  view  that  a “commodity  -which  at  all 
“ times  required  the  same  sacrifice  of  toil  and  labour  to  produce 
“it”  would  be  “invariable  in  value  ”0  which  implies,  what  he 
elsewhere  expressly  says,  that  “ labour  is  a measure  by  which 
“ the  real  as  well  as  the  relative  value  ” of  things  “ may  be 
“estimated.”  But  on  this  view  the  “real  value”  of  things 
must  be  different  from  their  “ exchangeable  value  ” — even  rela- 
tively to  labour;  since  the  proportion  that  labourers  obtain 
of  wbat  they  produce  admittedly  varies.  I am  not  aware  that 
Ricardo  anywhere  expressly  drawls  attention  to  this  distinction 
between  the  “cost  or  real  value”  of  things  and  their  “ex- 
“ changeable  value  ; but  it  is  definitely  stated  by  his  disciple 
McCulloch,  who  affirms  that  “ real  value  or  cost  is  to  be  esti- 
“ mated  by  the  quantity  of  labour  directly  or  indirectly  expended 
“on  its  acquisition while  admitting  that  it  is  only  under 

1 Kicardo,  Political  Economy,  c.  xx. 

2 As  I have  already  said,  I ara  of  opinion  that  Ricardo  does  not  quite  clearly 
distinguish  between  a theory  of  the  causes  of  a change  in  value  and  a view 
of  what  constitutes  such  a change. 

3 McCulloch,  Political  Economy,  Part  If.  c.  i. 


CHAP.  II  DEFINITION  AND  MEASUEE  OF  VALUE 


67 


special  circumstances  that  the  “exchangeable  value,”  even  of 
a “ freely  produced  commodity,”  exactly  corresponds  to  its  real 
value. 

It  is  remarkable  that  Ricardo  and  M‘'Culloch ' could  delibe- 
rately adhere  to  the  statements  above  quoted,  while  they  at 
the  same  time  drew  attention  to  the  differences  in  the  value 
of  different  products  due  to  the  different  degrees  of  durability  of 
the  capital  employed  in  producing  them: — or,  which  (as  Ricardo 
says)  is  the  same  thing,  the  different  lengths  of  time  required 
to  elapse  in  each  case  between  the  application  of  productive 
labour  and  the  transfer  of  its  product  to  the  consumer.  At  any 
rate  all  economists — except  those  Socialists  who  have  perverted 
Ricardo’s  inconsistency  into  an  argument  against  the  remu- 
neration of  capitalists — would  now  agree  that  in  M'Culloch’s 
estimate  of  cost  “ labour  and  delay  ” (or  some  corresponding 
term)  must  be  substituted  for  “labour”  simply. 

With  this  qualification,  the  Ricardian  interpretation  of  the 
common  notion  of  “ real  value  ” appears  to  me  tenable ; especi- 
ally when  we  consider  value  from  the  social  point  of  view.  It 
does  not  seem  forced  or  strained  to  say  that  products  in  general 
have  grown  “really  cheaper,”  meaning  that  society  would  not 
have  to  give  so  much  labour  and  time  in  order  to  obtain  them. 
As  was  before  said,  in  the  ‘comparison  of  alternatives’  which 
I hold  to  be  essentially  implied  in  the  common  notion  of  value, 
the  exact  nature  of  the  alternatives  compared  is  not  determined; 
and  when  we  consider  in  the  aggregate  the  valuable  products 
of  the  labour  of  any  community  it  is  natural  to  compare  this 
aggregate  of  products  with  the  labour  (and  delay)  that  it  would 
cost  to  reproduce  them — so  far  at  least,  as  we  should  desire 
to  reproduce  them.  Hence  I regard  the  question  ‘ whether  a 
‘ thing  costs  more  to  produce  ’ as  an  admissible  interpretation 
of  the  question  ‘whether  its  value  has  really  risen ’h  I do  riot, 

^ The  doctrine  of  Kicardo’s  that  we  have  been  discussing  sho'uld  be  carefully 
distinguished — as  it  is  by  its  author — from  the  view  taken  by  Adam  Smith 
in  adopting  labour  as  the  “real  measure  of  exchangeable  value,”  for  Adam 
Smith  means  not  the  labour  expended  in  producing  anything,  hut  the  labour 
that  it  would  buy.  The  reason  that  he  gives  for  his  view  is  that  “ labour  never 
“varies  in  its  own  value.”  In  saying  this  he  does  not  of  course  mean  that 
labour  does  not  vary  in  its  exchange  value-,  he  is  perfectly  aware  that  “ it  may 
“ sometimes  purchase  a greater  and  sometimes  a smaller  quantity  of  goods.” 
What  he  means  is  that  labour  is  always  the  same  sacrifice  to  the  labourer : has 

5—2 


68 


POLITICAL  ECONOMY 


BOOK  I 


however,  think  that  Ricardo  or  any  of  his  followers  has  fully 
faced  the  difficulty  of  making  this  notion  of  cost  quantitatively 
precise.  For  to  do  this  we  require  a common  measure  for 
labour  and  delay  and  for  different  kinds  of  labour:  and  if  we 
take — as  the  customary  measure — the  market  price  of  these 
different  sacrifices,,  we  get  a result  which  may  continually  vary 
while  the  sacrifices  remain  unchanged.  Also,  though  the  higher 
wages  paid  for  higher  qualities  of  labour  partly  represent  the 
extra  labour  that  has  been  employed  in  training  the  superior 


always,  we  may  say,  the  same  negative  “value  in  use”  for  him.  But  even  this 
statement,  if  unqualified,  is  in  palpable  contradiction  to  common  experience. 
An  amount  of  work  which  would  cause  no  sensible  inconvenience  to  a man 
in  health  would  be  a grievous  burden  to  an  invalid;  and  almost  all  men  like 
tasks,  which  they  are  conscious  of  being  able  to  accomplish  well,  better  than  if 
they  could  only  perform  them  indifferently.  In  fact,  when  we  consider  the 
higher  kinds  of  skilled  labour,  it  must  be  evident  that  the  labourer  often  gets 
more  enjoyment  out  of  his  work  than  he  does  out  of  anything  else  in  life.  So 
much,  indeed,  Adam  Smith  seems  by  implication  to  allow.  He  is  thinking  only 
of  common  labour;  and  even  as  regards  this  he  only  maintains  that  “equal 
“ quantities  of  labour,  at  all  times  and  places,  may  be  said  to  be  of  equal  value 
“ to  the  labourer,”  in  the  sense  that  “ in  his  ordinary  state  of  health,  strength, 
“ and  spirits,  in  the  ordinary  degree  of  his  skill  and  dexterity,  he  must  always 
“ lay  down  the  same  portion  of  his  ease,  his  liberty,  and  his  happiness”  {If’ealth 
of  Nations,  Book  I.  c.  v.).  The  qualifications  thus  introduced  are  considerable; 
but  even  when  so  qualified,  the  statement  appears  to  me  inadmissible.  For  by 
“ equal  quantities  of  labour  ” Adam  Smith  must,  I suppose,  be  understood  to 
mean  labour  of  equal  intensity  for  equal  times:  but  then,  as  Jevons  says, 
“intensity  of  labour  may  have  more  than  one  meaning:  it  may  mean  the 
“quantity  of  work  done,  or  the  painfulness  of  the  effort  of  doing  it.”  It  is 
the  latter  of  these  characteristics  which  Jevons  chooses  for  measuring  labour: 
but  if  we  take  this  view  of  quantity,  Adam  Smith’s  proposition  is  reduced  to 
the  tautology  that  equally  painful  labour  is  always  equally  painful  to  the 
labourer;  if,  on  the  other  hand,  we  measure  intensity  of  labour  by  quantity  of 
work  done,  Adam  Smith’s  proposition  comes  into  glaring  conflict  with  facts ; as 
will  be  evident  if  we  imagine  ourselves  proposing  to  an  average  Bengalee  in  his 
ordinary  condition  to  raise  through  a given  space  in  a given  time  the  amount  of 
weight  which  would  be  cheerfully  lifted  by  an  average  English  navvy  in  his 
ordinary  condition.  If,  however,  we  measure  “ quantit}-  of  labour”  by  time 
only,  the  statement  is  even  more  clearly  opposed  to  common  experience. 

There  seems,  therefore,  to  be  no  sense  in  which  .\dam  Smith’s  proposition 
can  be  accepted.  But  even  if  it  were  granted  that  labour  has  always  the  same 
negative  ‘ value  in  use  ’ for  the  labourer,  I cannot  see  that  this  would  be  a 
sufficient  ground  for  taking  it  as  the  standard  of  exchange  value.  For  since  at 
the  same  time  and  place  the  labour  of  one  class  of  men  certainly  differs  in 
exchange  value  from  that  of  another  class,  we  shall  still  have  to  choose  which 
kind  of  labour  is  to  be  taken  for  the  standard;  and  any  such  choice  must 
necessarily  be  arbitrary,  as  the  reason  given  applies  equally  to  all  kinds. 


CHAP.  II  DEFINITION  AND  MEASURE  OF  VALUE 


69 


labourer,  it  is  evident  that  they  partly  correspond  to  natural 
superiorities — in  physical  strength  or  other  useful  qualities — 
which  have  no  necessary  relation  to  sacrifice  of  any  kind*.  We 
might  ask  also  whether  by  “ cost  ” is  meant  cost  according  to  the 
most  economical  method  of  production  which  is  known  and  used, 
or  according  to  that  ordinarily  employed,  or  average  actual  cost, 
or  what  is  or  might  be  the  cost  of  the  costliest  portion  required 
to  meet  the  demand : for  all  these  might  be  ditferent.  But  to 
pursue  these  difficulties  further  would  involve  an  anticipation  of 
the  Theory  of  Distribution  and  Exchange,  to  be  set  forth  in  the 
following  Book : and  this  is  not  needful  for  our  present  jiurpose, 
since  at  any  rate  Value  in  the  sense  in  which  it  is  equivalent  to 
Cost  cannot  serve  as  a measure  of  “ amounts  of  wealth  ” ^ : for 
the  very  point  of  an  improvement  in  industry  is  that  it  enables 
us  to  produce  more  wealth  in  proportion  to  the  cost. 

§ 3.  Shall  we  then  fall  back  on  the  answer  first  suggested, 
and  try  to  give  as  exact  a meaning  as  we  can  to  the  notion  of 
‘ change  in  value  relatively  to  things  in  general  ’ ? The  difficulties 
of  this  attempt  are  so  serious  that  many  writers  decline  them 
altogether : they  refuse  to  answer  the  question  whether  a thing 
has  risen  or  fallen  in  value  relatively  to  things  in  general ; and 
only  consider  whether  it  has  risen  or  fallen  relatively  to  some 
specified  commodity.  In  the  chapter  in  which  Mill  discusses 
the  ‘ Measure  of  Value  ’ he  seems  to  adopt  this  view.  “ A 
“ measure  of  exchange  value  ” [of  the  same  thing  at  different 
times  and  places],  he  says,  “ is  impossible”®.  We  find,  however, 
that  Mill  has  no  hesitation  in  pronouncing  on  the  extent  of  the 
rise  in  the  value  of  gold,  during  the  last  five  years  of  our  long 
struggle  with  Napoleon  ; when  the  notes  of  the  Bank  of  England 
were,  to  judge  merely  from  the  market-price  of  gold,  depreciated 
thirty  per  cent.  He  tells  us  that  “ the  state  of  Europe  at  that 
“time  was  such... that  the  value  of  the  standard  itself  was 
“ very  considerably  raised ; and  the  best  authorities,  among  whom 

’ Ricardo’s  statement  (Political  Economy,  c.  i.  § 2),  that  “the  estimation  in 
“ which  different  qualities  of  labour  are  held  comes  soon  to  be  adjusted  in  the 
“ market  with  sufficient  precision  for  all  practical  purposes  ” seems  to  me 
palpably  inadequate  to  meet  the  difficulty;  since  these  “adjustments  of  the 
“market”  are  continually  varying,  and  the  error  involved  in  treating  them  as 
stable  is  not  of  the  kind  that  economic  theory  can  legitimately  neglect. 

- This  Ricardo,  of  course,  clearly  sees;  cf.  next  chapter,  page  81. 

® Book  III.  c.  XV. 


70 


POLITICAL  ECONOMY 


BOOK  I 


“ it  is  sufficient  to  name  Mr  Tooke,  have,  after  an  elaborate  in- 
vestigation,  satisfied  themselves  that  the  difference  between 
“paper  and  bullion  was  not  greater  than  the  enhancement 
“in  value  of  gold  itself... the  evidences  of  the  fact  are  con- 
“ clusively  stated  in  Mr  Tooke’s  History  of  Prices  ” h But  if  so 
definite  a variation  in  the  value  of  gold,  between  two  different 
points  of  time,  can  be  established  on  conclusive  evidences,  it 
seems  clear  that  it  must  be  possible  to  “ measure  the  value 
“ of  the  same  thing  at  different  times,”  relatively  to  things  in 
general,  with  sufficient  exactness  for  practical  purposes.  And, 
indeed,  the  default  of  such  a measure  would  seriously  affect  our 
ordinary  comparisons  between  amounts  of  wealth  possessed  by 
individuals  or  nations  at  different  times.  For  we  commonly 
perform  such  comparisons  by  taking  the  money  value  of  each 
of  the  quantities  composed,  and  making  what  we  consider  due 
allowance  for  a rise  or  fall  in  the  purchasing  power  of  money 
during  the  intervening  period.  If  then  we  are  unable  to 
measure  changes  in  the  value  of  the  money  standard,  relatively 
to  things  in  general,  it  must  be  impossible  to  compute  the 
increase  or  decrease  of  wealth  between  two  different  times ; 
unless  some  other  measure  than  exchange  value  is  taken, 
which  will  involve  a serious  deviation  from  the  ordinary  view 
of  ‘amounts  of  wealth.’ 

It  therefore  seems  to  me  important  to  ascertain  precisely 
how  far  we  can  give  a definite  meaning  to  the  question, 
‘ whether  the  value  of  a thing  relatively  to  things  in  general,’  or 
its  ‘ general  purchasing  power,’  has  risen  or  fallen : and,  for  the 
reason  just  given,  we  may  conveniently  take  as  an  example  the 
particular  commodity  by  which  we  commonly  measure  other 
values.  Suppose,  then,  that  we  are  investigating  the  change  in 
the  value  or  purchasing  power  of  gold  between  tw'o  points  of 
time.  If  we  found  that  the  prices  in  gold  of  all  commodities 
had  risen  [or  fallen]  in  the  same  ratio,  we  should  ob’i’iously  take 
that  ratio  to  represent  the  fall  [or  rise]  in  the  value  of  gold. 
But  this  could  only  occur  by  the  rarest  of  accidents : the  ques- 
tion, therefore,  is,  if  we  find  the  changes  in  price  unequal,  and 
especially  if  we  find  that  some  prices  have  risen  and  others 
fallen,  on  what  principle  are  we  to  combine  these  different 


* c.  XIII.  § 6. 


CHAP.  II 


DEFINITION  AND  MEASURE  OF  VALUE 


71 


changes  into  one  result  ? As  Jevons  has  noticed,  different 
alternatives  present  themselves  at  this  point  of  the  inquiry, 
and  “ the  exact  mode  in  which  preponderance  of  rising  or  falling 
“ prices  ought  to  be  determined  is  involved  in  doubt.  Ought  we 
“ to  take  all  commodities  on  an  equal  footing  in  the  determina- 
“ tion  ? Ought  we  to  give  most  weight  to  those  which  are  least 
“ intrinsically  variable  in  value  ? Ought  we  to  give  additional 
“ weight  to  articles  according  to  their  importance,  and  the  total 
“ quantities  bought  and  sold  ? ” 

“ The  question,”  he  adds,  “ seems  to  be  one  that  no  writer 
“ has  attempted  to  decide — nor  can  I attempt  to  decide  it  ” h 

I think  that  if  we  are  guided  by  the  practical  interest 
which  men  in  general  have  in  asking  the  question,  we  must 
consider  different  articles  of  consumption “ as  important  in 
proportion  to  the  value  of  the  total  quantities  consumed ; 
notwithstanding  an  element  of  inexactness  which,  as  will 
presently  appear,  this  view  inevitably  involves.  To  make 
this  clear,  let  us  begin  by  considering  the  matter  from  the 
point  of  view  of  an  individual.  When  a man  asks  how  much 
gold  will  have  changed  in  value  twenty  years  hence,  what  he 
is  practically  concerned  to  know  is  how  far  at  the  end  of  this 
time  his  money  will  go  in  purchasing  the  articles  which  he 
habitually  consumes.  And  if  we  assume  that  his  consumption 
will  remain  unchanged,  the  question  can  be  simply  answered 
when  the  time  arrives — supposing  the  requisite  statistics  at- 
tainable— by  summing  up  the  amounts  of  money  paid  for  the 
things  consumed,  at  the  old  and  the  new  prices  respectively, 
and  taking  the  ratio  of  the  difference  to  the  whole  amount 
expended.  No  doubt  the  result  obtained  by  this  method  is 
likely  to  be  different  for  different  individuals,  even  at  the  same 
place : suppose,  for  instance,  that  at  the  end  of  the  time  corn 
has  risen  in  price  and  the  finer  kinds  of  manufactures  generally 
have  fallen ; we  shall  probably  find  that  a rich  man  has  got  to 

^ Investigations  in  Currency  and  Finance,  p.  21. 

^ The  distinction  thus  introduced  between  “articles  of  consumption”  and 
commodities  that  are  only  useful  for  the  production  of  other  wealth  is  further 
explained  and  justified  in  the  following  chapter  (§  4).  In  a later  chapter  (Book 
II.  c.  V.)  it  will  be  shewn  that  a somewhat  different  interpretation  of  the  notion 
of  “general  purchasing  power”  is  required  in  investigating  the  effects  of  a 
change  in  the  value  of  money  on  trade. 


72 


POLITICAL  ECONOMY 


BOOK  I 


pay  less  for  his  habitual  consumption,  and  a poor  man  more. 
But  this  does  not  seem  to  be  in  itself  any  reason  against 
applying  the  method  to  ascertain  the  change  in  the  purchasing 
power  of  gold  for  a whole  community^ ; since  we  have  simply  to 
treat  the  aggregate  consumption  of  the  individuals  comprising 
the  community  as  if  it  were  the  consumption  of  a single  indi- 
vidual. The  real  difficulty  does  not  lie  here,  but  in  the  fact 
that  the  habitual  consumption,  whether  of  individuals  or  of 
societies,  does  not  really  remain  unchanged  between  any  two 
points  of  time.  Even  if  we  leave  out  of  account  all  changes  in 
habitual  and  conventional  needs  and  desires,  the  mere  fact  that 
men  generally  buy  somewhat  more  of  things  in  proportion  to 
their  cheapness  will  cause  alterations  in  the  amounts  of  the 
different  elements  of  their  consumption.  Under  these  circum- 
stances the  proposed  method  presents  us  with  two  alternatives ; 
we  may  either  take  the  total  amounts  of  things  purchased  at 
the  later  period  and  consider  how  much  they  would  have  cost 
twenty  years  before,  or  we  may  exactly  reverse  the  process.  It 
is  manifest,  however,  that  these  alternative  procedures  might 
lead  to  different  and  even  opposite  answers  to  the  question, 
‘ What  change  has  occurred  in  the  general  purchasing  power  of 
money  ? ’,  since  it  may  be  that  men  would  have  both  had  to  pay 
more  twenty  years  ago  for  what  they  buy  now,  and  also  more 
now  for  what  they  bought  twenty  years  ago.  So  far  as  this  is 
the  case,  we  must  say  that  the  question  whether  gold  has  risen 
or  fallen  in  value  does  not  properly  admit  of  a single  exact 
answer  by  the  method  of  comparing  prices : there  must  always 
be  a margin  of  inexactness  in  our  determination  of  the  amount 
of  change,  corresponding  to  the  difference  between  the  results 
of  the  two  procedures.  So  far  as  this  margin  is  concerned,  we 
have  to  abandon  the  pHiad  facie  exact  method  of  comparing 
prices,  and  to  substitute  the  inevitably  more  indefinite  pro- 
cedure of  comparing  the  amounts  of  ability  or  satisfaction 
obtainable  respectively  from  the  different  aggregates  of  h}q}o- 
thetical  purchases^. 


1 In  what  follows — to  the  end  of  the  next  paragraph — I assume,  for  sim- 
plicity’s sake,  that  the  community  may  be  considered  to  be  in  the  same  place, 
and  to  have  only  a single  market. 

2 In  .such  cases  we  may  often  obtain  a sufficient  approximation  to  accuracy 
by  the  simpler  method  of  confining  our  attention  to  the  articles  of  common 


CHAP.  II  DEFINITION  AND  MEASURE  OF  VALUE 


73 


And  we  have  to  deal  similarly  with  a further  source  of 
inexactness  introduced  into  this  calculation  by  the  progress  of 
the  industrial  arts.  The  products  of  industry  keep  changing  in 
quality ; and  before  we  can  say  whether  any  kind  of  thing — for 
example,  cloth — has  really  grown  cheaper  or  dearer,  we  must 
compare  the  quality — that  is,  the  degree  of  utility — of  the  article 
produced  at  the  beginning  of  the  period  with  that  of  the  more 
recent  ware.  This  source  of  difficulty  reaches  its  maximum  in 
the  case  where  entirely  new  kinds  of  things  have  been  produced 
or  brought  into  the  country  by  trade.  To  leave  them  out  alto- 
gether might  clearly  vitiate  the  result : for  a nation  might 
be  unable  to  buy  for  a given  sum  of  money  an  equal  amount 
of  the  articles  that  it  used  to  consume,  and  yet  might  be  able 
to  procure  a completer  satisfaction  of  its  wants  by  spending 
the  money  on  newly  introduced  wares : while,  further,  the 
raised  price  of  the  former  commodities  might  be  indirectly 
due  to  the  production  or  importation  of  the  latter. 

So  far  we  have  been  considering  the  difficulty  of  carrying 
a standard  of  value  from  one  time  to  another.  But  precisely 
similar  obstacles  stand  in  the  way  of  our  obtaining  definite 
results,  when  we  compare  the  different  values  of  gold  (or  any 
other  ware)  in  different  places  at  the  same  time : and  they  can 
only  be  partially  overcome,  by  methods  similar  to  that  just 
explained  L 

One  point  more  remains  to  be  considered.  In  speaking  of 
the  aggregate  of  “articles”  with  which  any  particular  com- 
modity has  to  be  compared,  in  order  to  ascertain  the  amount  of 
change  in  its  general  purchasing  power,  I have  tacitly  assumed 
that  only  material  commodities  are  included  in  the  aggregate. 
And  this,  I think,  would  be  the  case,  if  we  were  considering  the 

consumption  at  both  periods.  But  if  we  wish  to  get  the  closest  possible 
approximation  to  the  answer  that  we  are  really  seeking,  we  have  to  fall  back  on 
a rough  comparison  of  amounts  of  utility. 

' I may  observe  that  the  language  of  some  economists  would  suggest  that, 
for  measuring  value  during  an  interval  of  time,  the  problem  is  to  find  a con- 
crete identical  standard,  some  actual  thing  that  has  not  varied  in  value.  But 
the  difficulty  lies  much  deeper.  For  our  present  purposes  it  would  not  matter 
how  much  gold,  or  any  other  concrete  standard,  varied  in  value,  if  we  had  the 
power  of  accurately  measuring  its  variations ; since  this  power  would  give  us  an 
ideal  invariable  standard,  which  is  all  that  we  require  for  the  exact  measurement 
of  wealth.  But  as  it  is,  we  are  unable  to  make  even  this  ideal  standard  exact 
beyond  a certain  point. 


74 


POLITICAL  ECONOMY 


BOOK  I 


particular  commodity  as  a measure  of  wealth,  strictly  taken. 
But  if  our  ultimate  aim  is — as  has  been  supposed  in  the  pre- 
ceding sec  in — to  compare  the  different  amounts  of  purchased 
utility  corresponding  to  the  same  money  incomes  at  different 
times  and  places,  we  have  to  take  note  of  the  fact  that  a certain 
portion  of  a man’s  income  is  usually  employed  in  purchasing 
not  material  things  but  services  of  various  kinds.  He  buys 
from  Government  the  service  of  sending  his  letters  and  tele- 
grams; he  buys  from  railway  companies  the  service  of  conve}'ing 
himself  and  his  luggage  from  place  to  place ; if  he  is  compara- 
tively rich,  he  probably  spends  a considerable  sum  in  bupng 
domestic  services.  We  cannot  omit  these  services  from  the 
aggregate  of  commodities  with  which  the  standard  of  value  is 
compared,  when  our  aim  is  to  infer — as  exactly  as  possible — 
from  the  nominal  income  of  any  body  of  persons  their  real 
command  over  the  necessaries  and  conveniences  of  life’. 

§ 4.  In  a previous  section  I have  discussed  the  conception 
of  “ real  value  ” — as  distinguished  from  exchange  value — held 
by  Ricardo  and  M'Culloch : according  to  which  the  “ real  ” 
value  of  a thing  is  measured  by  the  labour  and  delay  that 
would  be  required  to  produce  it,  or  to  produce  something 
equally  useful-.  But  it  is  not  uncommon  to  use  the  tenn  “real 
“ value  ” without  any  reference  to  cost,  and  merely  as  imphing 
the  ordinary  antithesis  between  “ fact  ” and  “ opinion  ” ; as  when 
the  estimate  of  the  value  of  a thing  formed  by  a certain  indivi- 
dual, or  generally  current  in  the  market,  is  said  to  be  above  or 
below  its  “ real  ” value  or  worth.  A somewhat  similar  distinc- 
tion is  sometimes  taken  between  “subjective”  and  “objective” 
value.  It  is  desirable  to  examine  briefly  the  significance  of 
these  antitheses. 

We  may  begin  by  considering  their  application  to  “ value  in 
“ use.”  It  may  be  thought  that  this  kind  of  value  must  be 
“ subjective,”  as  being  obviously  relative  to  the  individual  who 
uses : and  no  doubt  when  we  speak — as  I before  spoke — of  the 
“ value  attached  ” by  an  individual  to  any  article,  we  generally 

’ Some  further  discussion  of  the  relation  of  services  to  material  wealth  will 
be  found  in  the  next  chapter  (§  4). 

- This  qualification  is  introduced  to  meet  such  cases  as  that  of  instruments 
which  we  should  not  reproduce  at  all,  if  they  were  destroj'ed,  but  should 
replace  by  something  less  costly  though  equally  useful.  In  a progressive  state 
of  the  arts  of  industry,  such  cases  are  frequent. 


CHAP.  II  DEFINITION  AND  MEASURE  OF  VALUE 


75 


mean  an  estimate  of  its  comparative  capacity  of  satisfying 
needs  and  desires  of  which  he  alone  has  immediate  knowledge. 
Still,  even  so,  his  present  estimate  may  be  shewn  by  subsequent 
experiences  to  have  been  mistaken : he  may  find  that  the  article 
really  affords  him  less  satisfaction  than  he  might  have  derived 
from  something  else  to  which  he  preferred  it.  And  if  the  utility 
of  the  article  consists  in  its  capacity  of  satisfpng  some  common 
physical  or  some  industrial  need — and  most  of  the  articles  that 
make  up  the  aggregate  which  we  call  wealth  are  useful  in  one 
or  other  of  these  ways — it  can  obviously  be  estimated  without 
any  reference  to  the  subjective  feelings  of  the  individual  using 
it.  In  this  way,  for  example,  we  may  estimate  the  “ objective  ” 
or  “ real  ” value  in  use  of  different  kinds  of  fuel,  or  stone  for 
building,  or  food  for  nutrition : and,  similarly,  we  might  speak 
of  the  really  higher  value  in  “ productive  use  ” or  “ business- 
use”  of  certain  instruments  of  production  as  compared  with 
others,  measuring  their  superiority  by  the  extra  quantum  of 
produce  obtainable  by  using  them.  This  “ value  in  business- 
“use”  does  not  necessarily  correspond  with  the  value  in  exchange 
of  such  instruments*.  It  may,  however,  afford  a measure  of  the 
amount  of  gain  to  a community  resulting  fi'om  any  particular 
invention.  Again,  in  dealing  with  land,  cases  occur  in  which 
recourse  must  be  had  to  the  idea  of  value  in  business-use,  in 
order  to  arrange  a fair  exchange.  Thus  when  a railway  company 
takes  a portion  of  land  from  a farm,  it  may  not  be  possible  to 
determine  the  compensation  that  it  ought  to  pay  by  the  ex- 
change value  of  the  land  taken,  since  it  may  easily  happen  that, 
if  sold  separately,  its  price  would  fall  much  below  its  value  to 
the  farmer:  the  only  fair  way  of  determining  compensation  is 
by  estimating  the  value  of  the  land,  for  purposes  of  agricultural 
production,  to  the  person  who  possesses  or  uses  the  remainder^. 

* It  will  be  afterwards  explained  that  the  market-value  of  any  kind  of 
commodity  does  not  tend  to  correspond  to  its  total  utility — as  compared  with 
any  other  commodity— but  to  what  Jevons  has  called  its  final  utility,  i.e.,  the 
utility  of  the  last  portion  which  it  is  found  advantageous  to  purchase.  Compare 
the  following  chapter,  § 2,  and  Book  II.  chapter  ii. 

^ It  should  be  observed  that  in  the  case  supposed  in  the  text,  a certain 
extra  compensation,  over  and  above  the  equivalent  for  agricultural  value,  would 
be  claimed  for  “value  in  use”  of  a more  subjective  kind:  for  example,  for  the 
loss  of  a portion  of  an  estate  to  which  the  owner  may  be  attached  from 
old  association. 


76 


POLITICAL  ECONOMY 


BOOK  I 


And  since  in  any  such  estimate  the  future  as  well  as  the 
present  conditions  of  agriculture  would  have  to  be  taken  into 
account,  it  is  easy  to  see  that  the  estimates  of  different  persons 
might  be  very  different,  and  even  that  the  “ real  ” value  in  use 
of  the  land  in  question  may  turn  out  to  be  very  divergent  from 
any  of  the  prospective  estimates. 

In  this  way  we  see  how  the  exchange  value  of  a permanent 
instrument  of  production,  such  as  land,  may  be  different  from 
what  we  may  fairly  call  its  “ real  ” value  in  exchange : for — 
owing,  let  us  say,  to  a “ scare  ” as  to  the  prospects  of  agi’i- 
culture — the  future  exchange  value  of  its  produce  may  be 
underestimated,  and  the  present  exchange  value  of  the  land 
may  be  proportionally  depressed.  In  this  case  what  we  mean 
by  “real”  value,  is  the  hypothetical  exchange  value  which  would 
result  from  the  substitution  of  truth  for  error  in  the  minds  of 
actual  and  possible  purchasers.  This  use  of  the  term  “ real 
“ value  ” is  convenient  in  ordinary  discourse.  I think,  however, 
that  it  should  as  a rule  be  avoided  in  any  discussion  that  aims 
at  scientific  precision ; and,  when  the  term  is  used,  a careful  ex- 
planation should  be  given  of  the  particular  kind  of  error  or 
ignorance  which  we  seek  to  eliminate.  For  in  many  cases,  we 
should  find  various  kinds  and  degrees  of  error  in  the  minds  of 
the  persons  whose  judgments  determine  the  price  of  a com- 
modity; and  it  would  generally  be  quite  arbitrary  to  select 
one  of  these  and  regard  its  elimination  as  the  one  thing  needful 
to  make  the  current  opinion  of  value  correspond  to  the  reality. 
And  if,  in  order  to  determine  the  real  value  of  any  thing,  we 
were  to  suppose  knowledge  of  all  facts  materially  affecting  its 
value,  in  the  estimate  of  intelligent  persons,  to  be  substituted 
for  ignorance  and  error  in  the  minds  of  all  the  persons  con- 
cerned, we  should  often  get  a h;yq)othesis  so  remote  from  reality 
that  it  would  be  at  once  impossible  to  calculate  the  hypothetical 
value,  and  absurd,  if  we  could  calculate  it,  to  call  it  “real.” 
For  the  limitations  of  knowledge  actually  existing  in  the  minds 
of  producers,  dealers,  and  consumers  are  among  the  most  im- 
portant of  the  facts  on  which  any  particular  intelligent  dealer 
bases  his  estimate  of  value : the  removal  of  such  limitations 
would  be  a fundamental  alteration  of  the  facts.  To  take  a very 
simple  case : suppose  that  a private  bank  of  issue  with  a large 
and  steady  business  was  at  a given  time,  owing  to  heavy  losses. 


CHAP.  II  DEFINITION  AND  MEASURE  OF  VALUE 


77 


not  in  a condition  to  meet  its  liabilities  if  a run  had  been  made 
on  it  compelling  it  to  stop  payment : but  that,  as  the  secret  was 
kept,  it  passed  safely  through  the  crisis,  and  is  now  in  a condition 
of  complete  solvency.  What  shall  we  say  was  the  “ real  value  ” 
— according  to  the  current  usage  of  the  term — of  the  bank’s 
promises  to  pay,  at  the  time  of  crisis  ? If  its  condition  had  been 
generally  known,  they  would  have  been  worth  less  than  their 
nominal  value  ; but  as  it  was  not  known  they  have  actually  been 
as  valuable  as  the  coin  they  represented.  The  question,  there- 
fore, is  surely  too  indeterminate  to  admit  of  a decided  answer. 
And  much  greater  perplexities  would  arise  in  other  more  com- 
plex cases  : therefore,  if  this  notion  of  “ real  value  ” as  divergent 
from  actual  price  is  introduced  at  all,  it  ought  at  least  to  be 
accompanied  by  a statement  of  the  particular  substitution  of 
knowledge  for  ignorance  or  error  which  is  implicitly  supposed. 


CHAPTER  III. 

WEALTH. 

§ 1.  In  the  preceding  chapter  I have  tried  to  make  clear 
the  kind  and  degree  of  inexactness  which  necessarily  enters  into 
all  comparisons  between  amounts  of  wealth  possessed  by  persons 
or  communities  living  respectively  at  different  times  or  in  distant 
places,  so  long  as  we  adhere  to  the  commonly  accepted  method 
of  measuring  wealth  by  its  exchange  value.  The  difficulties  of 
such  measurement  hardly  appear  so  long  as  we  are  merely  con- 
sidering and  comparing  the  wealth  of  individuals  (or  even  of 
classes)  at  any  particular  time  and  place  b The  wealth  of  any 
individual  is  usually  considered  to  include  all  useful  things — 
whether  material  things,  as  food,  clothes,  houses,  &c.,  or  imma- 
terial things,  as  debts,  patents,  copyrights,  &c. — which  being  at 
once  valuable  and  transferable  admit  of  being  sold  at  a certain 
price.  And  this  aggregate  is  suitably  measured  by  its  exchange 
value;  the  common  standard  of  value,  money,  being  taken  for 
convenience’  sake.  Our  object  in  such  estimates  is  to  compare 
the  potential  control  of  any  one  individual  here  and  now,  over 
all  purchaseable  commodities,  with  that  of  any  other  individual ; 
and,  so  far  as  such  control  is  transferable,  the  ordinary  mode  of 
measurement  enables  us  to  make  this  comparison  with  as  much 
accuracy  as  the  imperfection  of  markets  allows. 

But  when  we  try  to  compare  the  amounts  of  wealth  possessed 
by  persons  or  communities  li%dng  at  different  times  or  in  remote 

* By  “place”  must  be  understood  a region  sufficiently  limited  in  size  not 'to 
admit  of  any  material  variation  in  the  purchasing  power  of  money  within  it. 


CHAP.  Ill 


WEALTH 


79 


places,  we  are  met  by  the  difficulties  that  we  have  been 
examining  in  the  preceding  chapter.  So  long,  indeed,  as  we 
are  only  contemplating  some  one  element,  of  wealth,  some 
particular  kind  of  valuable  article  (of  which  the  quality  is 
supposed  to  be  the  same  at  the  different  times  and  places 
considered),  we  naturally  estimate  its  amount  as  wealth  by 
the  ordinary  measure  of  quantity.  But  when  we  have  to- 
compare  aggregates  of  wealth  made  up  of  heterogeneous  ele- 
ments, it  becomes  necessary  to  reduce  the  units  of  quantity 
of  these  different  elements  to  some  common  standard  of  mea- 
surement ; and  if  we  adhere  to  our  original  standard  of  exchange 
value,  we  have  to  deal  with  the  problem  of  keeping  this  mea- 
sure identical,  in  spite  of  the  variations  in  relative  value  among 
the  elements  measured.  But,  as  we  have  seen,  this  problem 
does  not  admit  of  a complete  solution.  Such  a measure — except 
under  purely  hypothetical  circumstances — is  liable  to  a certain 
amount  of  inexactness,  the  limits  of  which  we  can  define,  but 
which  we  are  unable  to  remove ; and  in  the  effort  to  make 
it  as  exact  as  possible,  we  are  reduced  in  many  cases  to  an 
inevitably  vague  comparison  between  the  utilities  of  diverse 
commodities. 

But  again,  such  comparisons  are  liable  to  be  further  vitiated 
by  the  varying  relations  of  purchased  to  unpurchased  utilities, 
at  different  times  and  places.  We  have  already  observed  that 
in  ordinary  thought  wealth  is  measured  by  its  money  value : 
thus  it  is  natural  that  economists,  while  pointing  out  the 
defectiveness  of  this  measure,  should  still  have  retained  the 
characteristic  of  “possessing  exchange  value”  as  an  essential 
part  of  the  definition  of  wealth ; and  that  in  so  doing  they 
should  have  conceived  themselves  to  be  in  harmony  with  the 
common  sense  of  mankind.  Accordingly  they  have  excluded 
from  the  notion  of  wealth  such  unpurchased  though  useful 
things  as  the  sun’s  light  and  heat,  air,  the  rain  that  waters 
the  ground,  water  in  rivers  and  seas,  &c.  They  do  not,  how- 
ever, seem  to  have  observed  the  difficulties  that  this  view 
involves,  so  soon  as  we  try  to  compare  the  amounts  of  wealth 
possessed  by  human  societies,  inhabiting  different  regions  of 
the  earth’s  surface.  For  we  find  not  merely  that  such  useful 
unbought  things  are  indispensable,  as  instruments  or  auxiliary 
materials,  to  the  production  of  things  that  have  exchange- 


80 


POLITICAL  ECONOMY 


BOOK  I 


value  ^ ; but  also — which  is  the  important  point — that  they 
are  instruments  and  materials  of  very  various  degrees  of  ef- 
ficiency in  different  regions.  Now  since  a large  part  of  what 
is  valued  and  exchanged  as  wealth  consists  in  instruments  and 
materials  only  useful  as  means  of  producing  other  wealth,  it  is 
paradoxical  to  draw  a sharp  line  between  purchased  and  un- 
purchased instruments  and  materials,  so  as  to  call  a community 
“ richer  ” because  it  possesses  more  of  the  former,  though  it  may 
actually  have  less  means  on  the  whole  of  producing  things  di- 
rectly useful.  The  difficulty  becomes  greater  when  the  pur- 
chased and  unpurchased  instruments  have  a close  resemblance 
to  each  other ; as  in  the  case  where  the  water-ways  of  a country 
consist  partly  of  canals  and  partly  of  rivers  and  creeks.  The 
difficulty  extends  in  range  when  we  observe  how,  as  civilisation 
progresses,  so  important  an  instrument  as  land  tends  to  pass 
over  from  the  class  of  unpurchased  to  that  of  purchased  utilities. 
It  seems  contrary  to  common  sense  to  say  that  a nation’s  w'ealth 
has  increased  because  an  instrument  that  it  previously  possessed 
has  become  valuable  by  becoming  scarce.  Thornton^  has  shewn 
effectively  the  kind  of  error  that  may  thus  be  introduced,  in 
comparing  the  average  wealth  possessed  by  members  of  the 
same  social  class  at  different  periods  of  a countrj^’s  histor}'. 
He  points  out  that  though  an  English  peasant  in  the  seven- 
teenth century  may  have  only  had  5s.  weekly  wages,  he  often 
enjoyed  also  a rent-free  site  for  his  cottage,  taken  from  the 
neighbouring  waste,  and  unpurchased  grazing  on  the  neigh- 
bouring common  for  cows,  sheep,  pigs,  and  poultr}'.  These 
things  ought  certainly  to  be  taken  into  account,  no  less  than 
changes  in  the  value  of  money,  in  comparing  such  a peasant’s 
share  of  wealth  with  that  of  an  agricultural  labourer  now. 

Again,  exchange  value  is  an  obviously  inappropriate  measure 
of  wealth,  in  the  case  of  durable  products  of  labour  w^hich,  fi:om 
their  special  adaptation  to  certain  unique  public  uses,  are  not 
properly  transferable,  and  have  no  market-price ; such  as  roads, 
cathedrals,  the  houses  of  parliament.  Such  things  are  clearly 
part  of  the  wealth  of  the  community ; but  we  cannot  measure 
the  quantum  of  wealth  contained  in  them  by  the  price  at  which 

1 It  may  be  observed  that  the  advantages  of  climate,  Ac.,  are  in  this  way 
indirectly  transferable. 

2 On  Labour,  Introduction. 


CHAP.  Ill 


WEALTH 


81 


they  would  sell  if  they  had  to  be  sold ; nor,  again,  by  the  price 
at  which  they  could  be  produced,  for  it  may  easily  be  that  if 
they  were  destroyed  it  would  not  be  worth  while  to  reproduce 
them.  In  such  cases,  then,  the  standards  of  the  market  fail  us ; 
we  have  to  fall  back  upon  ‘ value  in  use.’ 

The  same  considerations  apply,  in  a minor  degree,  to  any 
kind  of  property  that  is  more  useful  to  the  owner  than  it  is  to„ 
any  one  else.  A man’s  command  over  the  necessaries  and  con- 
veniences of  life  is  not  affected  by  any  fall  in  the  market  value 
of  his  property,  except  so  far  as  he  wishes — or  may  wish — to 
sell  it:  in  proportion  as  he  neither  has  nor  is  likely  to  have 
such  a wish,  exchange  value  becomes  a manifestly  irrelevant 
consideration  in  the  estimate  of  his  wealth. 

§ 2.  If,  then,  the  common  measurement  of  w'ealth  by  ex- 
change value  requires  to  be  thus  variously  corrected  and  supple- 
mented by  estimates  of  utility,  would  it  not  be  simpler,  and 
really  more  consistent  with  ordinary  thought,  to  take  utility  as 
the  sole  standard  ? 

This  is  the  view  of  Ricardo : who,  regarding  the  value  of  a 
thing  as  directly  proportioned  to  “ the  quantity  of  labour 
“ employed  in  producing  it,”  was  necessai;ily  led  to  separate 
the  measure  of  wealth  altogether  from  the  measure  of  value ; 
since,  otherwise,  he  would  have  incurred  the  absurdity  of  denying 
that  a country’s  wealth  is  increased  by  an  enlarged  supply  of 
products  due  to  increased  facility  of  production.  How  then  are 
we  to  measure  utility?  Ricardo*  treats  this  as  a very  simple 
matter.  “A  man  is  rich  or  poor  according  to  the  amount  of 
“necessaries  and  luxuries  that  he  can  command”;  and,  therefore, 
if  he  gets  two  sacks  of  corn  where  he  could  only  get  one  before, 
he  gets  “ double  the  quantity  of  riches,  double  the  quantity  of 
“ utility,  double  the  quantity  of  what  Adam  Smith  calls  value 
“ in  use.”  But  surely  any  man  who  got  two  sacks  of  corn  where 
he  had  only  counted  on  one  would  willingly  exchange  a great 
part  of  the  second  for  things  which  he  would  not  take  in 
exchange  for  an  equal  part  of  the  first : if  such  an  exchange  is 
out  of  the  question,  though  he  may  find  a use  for  the  second 
sack  it  will  certainly  not  be  as  useful  as  the  first.  And  this  is 
no  less  true  of  a community.  Suppose  a harvest  of  double  the 
ordinary  abundance  in  a fertile  isolated  country : the  additional 

* Principles  of  Political  Economy  and  Taxation,  c.  xx. 


S.  P.  E. 


6 


82 


POLITICAL  ECONOMY 


BOOK  I 


quantum  of  com  will  obviously  not  have  a corresponding 
quantum  of  social  utility ; it  may  even  be  of  no  use  except  to 
burn,  as  is  said  to  have  been  sometimes  the  case  in  the  Western 
States  of  North  America.  In  fact,  as  Jevons  has  admirably  ex- 
plained h the  variations  in  the  relative  market  values  of  different 
articles  express  and  correspond  to  variations  in  the  comparative 
estimates  formed  by  people  in  general,  not  of  the  total  utilities  of 
the  amounts  purchased  of  such  articles,  but  of  their  final  utilities; 
the  utilities,  that  is,  of  the  last  portions  purchased.  From  the 
fact  that  when  things  become  dearer  people  generally  buv 
somewhat  less  of  them,  we  may  infer  that  they  estimate  the 
portion  which  they  refrain  from  buying  as  only  just  worth  the 
money  that  they  previously  gave  for  it,  while  considering  what 
they  still  buy  to  be  worth  the  higher  priced  If  the  price  rose 
further,  'a  further  reduction  of  purchases  would  similarly  in- 
dicate that  another  portion  of  the  article  was  generally  j udged 
to  be  less  useful  than  the  amount  still  bought ; and  so  on,  for 
each  rise  in  price.  Hence  when  the  supply  of  any  article  has 
been  increased  and  its  price  consequently  fallen,  it  is  not  really 
coiTect  to  reckon  the  total  utility  of  the  article  as  having 
increased  in  proportion  to  the  increase  in  quantity;  any  more 
than  it  is  correct  to  regard  it  as  ha\dng  decreased  in  proportion 
to  the  decrease  in  value.  We  ought  to  regard  the  additional 
quantum — so  far,  at  least,  as  it  is  supplied  to  the  preHous 
consumers — as  composed  of  parts  of  continually  decreasing 
utility ; the  rate  of  decrease  being  measured  by  the  fall  in 
price,  supposing  the  purchasing  power  of  money  relatively  to 
all  other  articles  to  remain  unchanged.  If  we  assume  the  rate 
of  decrease  to  be  approximately  uniform,  we  may  regard  the 
decrease  in  the  average  utility  of  the  increment  of  supply  as 
corresponding  roughly  to  about  half  the  fall  in  price.  In  this 
way  we  not  only  avoid  the  difficulties  that  arise  in  the  measure- 
ment of  wealth  by  exchange  value ; we  also  obtain  a satisfactory 
explanation  of  these  difficulties. 

* Theory  of  Political  Economy,  c.  iv. 

2 It  should  be  observed  that  there  is  one  case — not  without  importance 
when  we  are  dealing  with  luxuries — to  which  this  principle  does  not  apply. 
This  is  the  case  of  things  desired  and  valued  on  account  of  their  rarity.  Of 
such  things  the  total,  and  not  merely  the  final,  utility  pro  tanto  is  decreased  by 
an  increase  of  supply.  A similar  exception  must  be  made  in  the  case  of  money, 
as  is  noticed  later.  (Cf.  Book  II.  c.  v.,  note  at  the  end  of  the  chapter.) 


CHAP.  Ill 


WEALTH 


83 


On  the  other  hand,  it  must  be  admitted  that  this  measure- 
ment by  utility  brings  us  into  an  awkward  conflict  with  usage, 
when  we  consider  it  as  applied  to  variations  in  amount  of  things 
of  any  one  kind ; or  even  to  variations  in  an  aggregate  of  things 
that  do  not  vary  in  relative  value.  Suppose  that  owing  to  im- 
provements in  production  the  English  nation  became  possessed 
of  twice  the  amount  of  each  kind  of  commodity  that  it  now 
consumes ; it  would  be  paradoxical  to  say  that  its  wealth  had  not 
doubled,  as  we  should  be  obliged  to  do  according  to  the  view  just 
explained.  Further,  the  demonstration  above  given  that  “final 
“ utility  ” decreases  as  supply  increases  involved  the  assumption 
that  the  additional  supply  of  the  cheapened  article  is  purchased 
and  consumed  by  the  consumers  of  the  previous  supply ; it  is, 
therefore,  inapplicable  so  far  as  the  article  is  bought  by  different 
purchasers  in  different  pecuniary  circumstances.  If  tea,  be- 
coming cheaper,  is  bought  by  a poorer  class,  what  reason  have 
we  for  saying  that  what  they  purchase  is  not  as  useful  as  the 
dearer  tea  previously  purchased  by  the  rich  ? Indeed,  is  it  not 
reasonable  to  suppose  that  a given  commodity  is  more  useful 
when  bought  by  the  poor,  because  the  poor  have  fewer  luxuries 
and  therefore  get  more  enjoyment  out  of  what  they  have  ? In 
fact  we  are  merely  extending  to  wealth  generally  the  principle 
just  laid  down  in  respect  of  particular  kinds  of  wealth  if  we 
assume  that,  on  the  average,  each  additional  increment  to  the 
amount  possessed  by  any  one  individual  has  a decreased  utility. 
But  in  this  case,  if  we  measure  wealth  simply  by  its  utility, 
‘ amount  of  wealth  ’ will  partly  be  determined  by  the  manner  in 
which  the  wealth  is  distributed ; and  we  cannot  say  how  much 
wealth  there  is  in  a country,  till  we  know  how  it  is  shared 
among  its  inhabitants.  Nay,  we  shall  even  have  to  ascertain  how 
it  is  managed  in  each  separate  household  ; since  a given  supply 
of  material  products  is  less  useful  in  proportion  as  it  is  un- 
economically  consumed. 

These  considerations  are  important  when  we  are  endeavour- 
ing to  estimate  the  amount  of  utility  or  satisfaction  derived  by 
a community  from  the  aggregate  of  things  which  make  up  its 
wealth.  At  the  same  time  they  shew  that  to  measure  wealth 
simply  by  utility  would  cause  an  inconvenient  divergence  fi’om 
common  thought  and  common  language ; and  therefore,  though 
in  Book  III.  we  shall  have  to  deal  with  the  difficulties  of 


6—2 


84 


POLITICAL  ECONOMY 


BOOK  I 


measuring  social  utility,  I do  not  propose  to  adopt  this  standard 
for  determining  ‘ amounts  of  wealth  ’ in  ordinary  economic 
inquiries.  It  seems  best  to  acquiesce  in  the  ordinary  method 
of  measuring  amounts  of  wealth  of  the  same  kind  by  quantity, 
and  comparing  amounts  of  wealth  of  different  kinds  by  their 
exchange  value;  being  content  to  get  over  the  difficulties  of 
carrying  this  measure  from  one  time  or  place  to  another,  in  the 
imperfect  manner  above  explained ; and  including  even  com- 
modities gratuitously  enjoyed  in  one  term  of  the  comparison 
if  things  similar  in  kind  are  included  (as  having  market  value) 
in  the  other  term.  Only  we  must  bear  in  mind  that  “ amount 
“ of  wealth,”  thus  estimated,  corresponds  but  imperfectly  to 
“ amount  of  utility  ” derived  by  the  community  from  the  things 
that  constitute  its  wealth. 

§ 3.  There  is  another  difficulty  lurking  in  the  conception  of 
Utility  as  a measure  of  wealth,  which  it  will  be  instructive  to 
discuss.  By  the  utility  of  material  things,  as  before  explained, 
we  mean  their  capacity  to  satisfy  men’s  needs  and  desires.  And 
so  long  as  we  regard  these  latter  as  constant,  it  seems  easy  and 
straightforward  to  say  that  men  are  richer  in  proportion  as  they 
are  better  able  to  satisfy  their  needs  and  desires.  But  it  is  not 
quite  so  easy  to  deal  with  the  case  in  which  their  needs  and  the 
means  of  satisfying  them  have  increased  pari  passu ; especially 
if  the  additional  need  is  a need  of  protection  against  some  pain  or 
danger  which  did  not  previously  threaten.  Suppose,  for  example, 
that  a country  is  visited  by  a new  peril  of  inundation;  and 
that,  by  the  extra  exertions  of  its  inhabitants,  an  embankment 
is  constructed.  Are  we  to  say  that  it  has  thereby  become  a 
richer  country  than  before  ? Or  again,  suppose  that  climate 
renders  the  inhabitants  of  one  country  liable  to  diseases  that  do 
not  occur  in  another.  Are  we  to  say  that  the  former  country 
is  the  richer  of  the  two,  if  its  excess  of  wealth  consists  merely 
in  remedies,  palliatives,  and  prophylactics  of  diseases  specially 
incident  to  its  climate  ? A similar  question  may  be  raised  as 
regards  means  of  protection  against  noxious  animals ; or,  again, 
as  regards  material  securities  against  mutual  injury  on  the 
part  of  the  citizens.  Shall  we  say  that  one  countr}’  is  richer 

1 Such  as  the  produce  of  waste  land  before  mentioned.  The  values  of  such 
gratuitously  obtained  commodities  would  of  course  have  to  be  supplied  from 
those  of  the  corresponding  articles  included  in  the  other  term  of  the  comparison. 


CHAP,  in 


WEALTH 


85 


than  another,  so  far  as  the  former  has  castles  with  battlements 
and  towers,  which  civil  peace  and  security  render  unnecessary 
in  the  latter?  If,  on  the  other  hand,  we  allow  ourselves  to 
be  led  by  this  kind  of  consideration  to  limit  the  common 
denotation  of  the  term  wealth,  where  are  we  to  stop  ? For 
the  greater  part  of  the  material  products  of  any  countiy  are 
useful  as  means  of  protection  against  the  organic  pains  due 
to  cold,  inanition,  &c. ; and  in  different  regions  very  different 
amounts  of  the  produce  of  labour  are  required  to  make  such 
protection  effective : hence  it  may  be  said  that  inhabitants  of 
cold  climates  are  not  really  richer  because  they  require  more 
elaborate  houses,  more  clothing,  more  food,  and  far  more  fuel 
than  the  dwellers  in  warmer  regions.  I think  it  must  be  allowed 
that  the  significance  of  comparisons  between  the  amounts  of 
wealth  possessed  by  different  groups  of  persons  is  liable  to  be 
seriously  impaired  by  any  important  variations  in  their  needs 
and  desires : and  that  anything  more  than  a vague  and  general 
comparison  between,  for  example,  the  annual  produce  of  England 
and  that  of  a tropical  island  would  be  idle.  But  there  is 
not  the  same  objection  to  a quantitative  comparison  between 
the  wealth  of  England  and  that  of  Germany  or  France,  since 
the  physical  needs  of  the  populations  of  these  countries  may 
be  assumed  to  be  approximately  the  same : and  a similar  as- 
sumption is,  on  the  whole,  legitimate  in  comparing  England 
now  with  England  a century  or  half  a century  ago.  For  the 
primary  needs  of  an  Englishman,  the  food,  clothing,  shelter,  &c., 
that  his  race  and  climate  render  necessary  for  his  health, 
can  hardly  have  changed  materially;  and  though  secondary 
needs  of  tea,  tobacco,  newspapers,  &c.,  may  have  developed 
themselves  in  him  we  may  fairly  regard  the  satisfaction  of 
these  needs  as  a gain  in  the  aggregate  of  utility  derived  from 
material  objects. 

So  far  as  we  compare  the  wealth  of  societies  differing 
very  widely  in  elementary  needs,  the  important  question  is  not 
whether  either  has  more  wealth  on  the  whole  than  the  other, 
but  whether  it  has  more  wealth  to  spare  ; more  wealth  that  could 
be  safely  taken  from  its  inhabitants,  without  interfering  either 
with  their  health  or  with  their  productive  efficiency*. 

1 It  should  be  observed  that  what  the  members  of  a given  society  at 
a given  time  could  spare — in  the  sense  above  defined — depends  in  an  uncertain 


86 


POLITICAL  ECONOMY 


BOOK  I 


§ 4.  Again,  it  is  to  be  observed  that  different  classes  of 
valuable  things  are  related  to  human  needs  in  varying  grades 
of  directness : for  example,  bread  is  directly  useful,  flour  only 
for  making  bread  or  other  foods,,  com  chiefly  for  making  flour, 
arable  land  for  producing  com  and  similar  products:  and  at 
each  stage  there  are  instraments — those,  namely,  that  are  used 
by  bakers,  millers,  and  farmers — to  be  taken  into  account  as 
well  as  materials.  The  number  of  grades  is  different  in  different 
cases ; and  the  total  of  wealth  cannot  be  sharply  divided  into 
parts  corresponding  to  the  different  grades,  since  frequently  the 
utilities  of  the  same  thing  belong  partly  to  one  grade  and  partly 
to  another, — thus,  the  utility  of  a house  is  direct  in  so  far  as  it 
shelters  its  occupier  and  his  family,  but  indirect  so  far  as  it 
protects  useful  commodities.  A distinction  is,  however,  drawn 
in  ordinary  thought  and  discourse  between  the  valuable  things 
— such  as  agricultural  land,  mines,  factories,  machines  of  all 
kinds — which  are  used  in  the  trade  or  business  by  which  men 
earn  an  income  and  those  things — such  as  food,  clothes,  houses, 
furniture — on  which  they  spend  their  income  when  it  has  been 
earned : and  in  modem  economic  society,  where  nearly  all  pro- 
ducts of  labour  other  than  domestic  are  made  to  be  sold,  the 
former  species  of  wealth  includes  most  of  the  wealth  that  is 
only  indirectly  useful ; while  the  latter  includes  almost  all  that 
is  useful  directly.  It  is  convenient  to  distinguish  the  two  as 
Producers’  wealth  and  Consumers’  wealth  respectively.  The 
distinction  is  of  special  importance  when  we  are  considering 
social  wealth  and  production : since  what  is  commonly  promi- 
nent in  the  thought  of  men  when  they  speak  of  the  increase  or 
decrease  of  a country’s  wealth  is  certainly  its  supply  of  con- 
sumers’ wealth.  Producers’  wealth,  seems  to  be  thought  of  as 

and  varying  degree  upon  previous  habits,  and  upon  mental  and  social  conditions 
that  are  themselves  variously  modifiable,  and,  further,  that  there  is  no 
sharp  line  to  be  drawn  between  the  expenditure  which  increases  efficiency 
and  that  which  does  not ; in  most  cases,  before  we  come  to  quite  superfluous 
expenditure,  we  shall  find  a certain  portion  which  increases  the  consumers’ 
efficiency  in  a continually  diminishing  ratio  to  the  amount  consumed:  thus 
a labourer  may  do  a better  day’s  work  by  eating  meat  rather  than  bread,  while 
yet  the  difference  between  the  value  of  the  meat  and  that  of  the  bread  may 
be  greater  than  the  value  of  the  additional  produce  of  his  labour.  Still,  in 
spite  of  this  indeterminate  margin,  we  may  with  advantage  mark  off — as  clearly 
as  may  be — the  spare  or  superfluous  portion  of  the  wealth  of  a community  from 
that  which  is  required  to  keep  its  members  in  proper  working  condition. 


CHAP.  Ill 


WEALTH 


87 


wealth  only  in  a secondary  sense,  and  largely  because  it  is,  from 
the  point  of  view  of  the  individual,  capable  of  being  exchanged 
for  consumers’  wealth.  An  individual  may  at  any  moment  sell 
his  land  or  factory  and  purchase  consumers’  wealth  to  the  extent 
of  its  market  value : but  this  consideration  is  in  the  main  inap- 
plicable to  social  wealth,  as  the  community  cannot  similarly  sell 
its  land,  factories,  &c. 

From  a social  point  ‘of  view,  therefore,  it  is  misleading  to 
add  the  amount  of  consumers’  wealth  in  a country  at  any  time 
to  the  amount  of  producers’  wealth,  and  present  the  sum  of  the 
two  as  the  “ total  wealth  ” of  the  country : since  we  cannot 
assume  that  there  is  any  constant  proportion  between  the  two 
parts  of  the  total  thus  heterogeneously  composed.  In  fact,  the 
exchange  value  of  durable  instruments  of  production,  especially 
land,  may  increase  whilst  their  productive  utility  remains  un- 
affected ; for  the  price  that  people  are  willing  to  give  for  such 
instruments  depends  partly  on  the  current  rate  of  interest ; and 
hence  a fall  in  the  current  rate  of  interest  is  necessarily  attended 
by  a rise  in  the  selling  price  of  land,  railways,  &c.,  independently 
of  any  increase  in  their  utility.  If,  therefore,  we  simply  measured 
the  amount  of  wealth  contained  in  these  instruments  by  their 
exchange  value,  the  country  would  seem  to  have  received  a large 
increment  of  wealth,  merely  through  a fall  in  the  rate  of  interest. 
It  accordingly  seems  best,  in  an  inquiry  into  the  causes  of  the 
greater  or  less  “ wealth  of  nations,”  to  take  consumers’  wealth 
as  the  primary  object  of  investigation. 

There  is,  however,  an  important  difference  between  a nation’s 
stock  of  consumers’  wealth  and  what  Adam  Smith  takes  as  the 
primary  object  of  investigation  under  the  names  “ annual  pro- 
“ duce  of  labour  ” or  “ annual  supply  of  the  necessaries  and 
“conveniences  of  life.”  For  consumers’  wealth  is  of  various 
degrees  of  durability:  and  in  considering  a nation’s  command 
over  the  conveniences  of  life  we  have  to  take  into  account  not 
only  the  food  that  is  eaten  from  day  to  day  and  the  clothes  that 
are  worn  out  in  a few  years,  but  also  the  houses,  well  made 
furniture,  pictures,  jewels,  ornaments,  that  are  handed  down 
from  generation  to  generation.  At  the  same  time,  this  stock 
of  wealth  requires  not  only  continual  expenditure  of  labour  in 
care  and  repairs,  and  continual  additions  to  take  the  place  of 
what  is  slowly  consumed,  but  also  continual  adaptation  to  the 


88 


POLITICAL  ECONOMY 


BOOK  I 


changing  tastes — and  sometimes  the  changing  needs — of  suc- 
cessive consumers;  and  a corresponding  portion  of  the  utility 
derived  from  it  may  be  strictly  said  to  be  “ annually  produced  ” 
or  “ supplied.”  It  is  only  this  portion  that,  being  purchased  out 
of  the  annual  income,  is  properly  thought  of  as  part  of  the 

real  income  ” of  individuals  or  societies. 

But  when  we  thus  fix  our  attention  on  the  “ real  income  ” 
of  the  community  as  distinguished  from  its  resources,  another 
consideration  comes  into  view,  which  was  noticed  in  the  pre- 
ceding chapter.  A man’s  money-income  is  not  entirely,  though 
it  is  mainly,  spent  in  consumable  things — food,  clothing,  fuel, 
&c. : it  is  partly  spent  in  what  may  be  called  “ consumable 
“ services,”  i.e.,  utilities  furnished  by  the  labour  of  others, 
which  are  not  “ fixed  and  embodied  in  matter,”  such  as  the 
services  of  domestics,  physicians,  actors,  carriers.  Ought  we 
then  to  extend  the  conception  of  “ wealth  ” to  include  such 
services  ? There  is  something  to  be  said  for  this.  The  two 
kinds  of  utility  are  to  some  extent  alternatives;  and  there 
would  seem  to  be  a certain  absurdity  in  saying  that  people 
are  poorer  because  they  cure  their  diseases  by  medical  advice 
instead  of  drugs,  improve  their  minds  by  hearing  lectures 
instead  of  reading  books,  guard  their  property  by  policemen 
instead  of  man-traps  and  spring-guns,  or  amuse  themselves 
by  hearing  songs  instead  of  looking  at  pictures  \ It  may  be 
observed  too  that,  in  ordinary  estimates  of  the  aggregate 
income  of  the  inhabitants  of  a country,  directly  useful- — or, 
as  we  might  say,  “ consumable  ” — services  are  commonly  in- 
cluded : for  as  such  services  are  reckoned  as  paid  out  of 
incorne,  if  we  add  the  nominal  incomes,  estimated  in  money, 
of  those  who  render  such  services  as  well  as  those  who  receive 

1 It  is  worth  noticing  that,  as  Senior  pointed  out,  Political  Economy,  p.  51 
(2nd  edition),  the  line  drawn  by  common  language  between  utilities  “embodied” 
in  material  products,  and  utilities  that  are  merely  services,  depends  “on 
“differences  existing  not  in  the  things  themselves... but  in  the  modes  in  which 
“they  attract  our  attention.”  When  our  attention  is  principally  called  to  the 
result  of  labour,  in  altering  the  qualities  of  matter,  we  call  this  result  a new 
material  product;  when  it  is  principally  called  to  the  act  of  altering,  we  consider 
this  act  as  a service  applied  to  a product  previously  existing.  Thus  the  meuding 
of  shoes  is  commonly  treated  as  a service  because  we  pay  for  it  separately;  but 
we  consider  that  the  cook  at  a restaurant  ‘produces’  a dish,  because  our 
payment  for  his  operations  is  lumped  together  with  our  payment  for  the 
material  on  which  they  were  exercised. 


CHAP.  Ill 


WEALTH 


89 


them,  the  result  will  only  represent  the  aggregate  real  income^ 
of  the  country,  if  this  latter  notion  is  extended  so  as  to  include 
services.  Hence  when  we  pass  to  consider,  in  the  following 
Book,  how  this  aggregate  real  income  is  distributed  among  the 
members  of  the  community,  it  would  be  inconvenient  and 
misleading  not  to  enlarge  our  conception  of  the  aggregate 
distributed  so  as  to  include  services  as  well  as  material  pro- 
ducts. If,  as  I think,  the  term  wealth  is  by  usage  restricted 
to  stores  or  sources  of  utility  comparatively  permanent,  some 
other  term  must  be  found  to  include,  along  with  the  wealth 
annually  consumed,  what  I have  called  directly  consumable 
services : and  I propose  accordingly,  in  the  following  Book,  to 
employ  the  terms  “ commodities  ” and  “ produce  of  labour  ” in 
this  extended  way.  When,  however,  we  are  analysing  the 
causes  which  render  a community  more  or  less  liberally  sup- 
plied with  the  necessaries  and  conveniences  of  life,  it  seems  on 
the  whole  best  to  limit  the  object  of  investigation  in  a manner 
somewhat  different  from  that  which  is  appropriate  in  treating  of 
Distribution ; and  to  confine  ourselves  to  such  utilities  as  result 
. from  the  application  of  labour  to  man’s  material  environment. 
For  the  variations  that  we  find  in  considering  the  command  of 
different  societies  over  this  class  of  utilities  differ  greatly  in 
their  nature  and  causes  from  the  variations  in  the  quality  and 
abundance  of  professional  and  domestic  services;  and  it  would 
serve  no  useful  purpose  to  include  the  latter  in  the  same 
investigation  with  the  former. 

§ 5.  But  the  view  above  taken  of  material  wealth  as  com- 
posed of  permanent  sources  of  utility  raises  a new  question. 
Suppose  we  grant  that  services  are  not  wealth  on  account  of 
their  transiency ; still,  there  are  other  immaterial  things  which 
are  permanent  sources  of  utility,  and  why  should  not  these  be 
included  in  the  notion  of  wealth  ? For  instance,  we  consider 
that  a chief  result  of  a truly  liberal  education  is  to  impart 
culture ; that  is  to  develop  in  human  beings  the  capacities  for 
realising  certain  elevated  and  delightful  modes  of  mental  ex- 
istence, consisting  in  attainment  of  knowledge,  exercise  of 

^ It  should  be  observed  that  the  aggregate  nominal  income  represents  more 
than  the  aggregate  consumption  of  material  wealth  and  services ; since  it 
includes  also  that  portion  of  income  which  is  really  saved,  that  is,  which 
takes  the  form  of  additional  instruments,  materials,  &c. 


90 


POLITICAL  ECONOMY 


BOOK  I 


sympathy,  or  aesthetic  emotion  of  some  kind.  Such  modes  of 
existence  commonly  require  some  of  the  material  products 
ordinarily  thought  of  as  -wealth,  such  as  books,  microscopes, 
pictures,  &c. ; but  the  capacities  themselves  are  by  far  the  most 
difficult  and  expensive  conditions  of  making  actual  the  possible 
utilities  “ embodied  ” in  these  luxuries.  A man  can  buy  the 
plays  of  Shakespeare  for  3s.  Qd.  or  less ; but  he  cannot  buy  the 
capacity  for  enjoying  Shakespeare  without  a vastly  greater 
expenditure  of  his  own  and  others’  labour  than  3s.  Qd.  would 
remunerate.  Are  we  not  then,  it  may  be  asked,  to  regard  this 
culture,  when  acquired,  as  wealth,  as  much  as  the  less  important 
source  of  utility  which  we  possess  in  the  three-and-sixpenny 
volume  ? Certainly  the  facts  just  indicated  should  not  be 
overlooked  by  the  economist ; it  should  be  borne  in  mind  that 
the  expenditure  of  wealth  and  labour  in  producing  culture  is 
an  indispensable  condition  of  realising  the  most  important  part 
of  the  utilities  which  we  commonly  but  imperfectly  conceive  as 
attached  to  the  material  things  that  we  call  luxuries.  Kot  only, 
however,  is  usage  clearly  opposed  to  our  calling  culture  wealth ; 
but — what  is  more  important — the  investigation  of  the  causes 
of  improvement  in  quality  and  increased  diffusion  of  culture 
has  for  the  most  part  but  little  natural  connexion  Avith  an 
investigation  of  the  causes  of  improvement  in  our  supply  of 
material  commodities. 

This  latter  argument,  however,  does  not  apply  to  the  case  of 
technical  knowledge  and  trained  skill.  It  is  clear  that  a com- 
munity may  increase  its  means  of  producing  commodities  as 
much  by  improving  the  mechanical  knowledge  and  skill  of  its 
inhabitants  as  by  adding  to  its  stock  of  inanimate  instru- 
ments'; and  that  it  depends  on  circumstances  which  of  these 
two  courses  is  at  any  time  the  more  profitable  emplojunent  of 
national  wealth  and  labour.  Hence — although,  as  skill  is  not 
directly  transferable,  it  is  contrary  to  usage  to  call  it  wealth — 

* It  may  be  worth  while  to  observe  that  the  non-transferability  of  skill 
has  a certain  effect  in  diminishing  the  reasonable  expectation  of  national  ad- 
vantage from  producing  it;  since  it  somewhat  increases  the  danger  that  the 
utility  aimed  at  may  not  ultimately  be  realised.  We  may  assume,  generally 
speaking,  that  a machine  will  be  used  so  long  as  it  is  worth  using ; since  if 
its  present  owner  is  too  lazy  to  use  it  he  can  sell  it;  but  as  skill  cannot  so 
be  transferred,  it  may  remain  unused,  merely  because  its  possessor  can  obtain 
as  much  wealth  as  he  wants  in  some  other  way. 


CHAP.  Ill 


WEALTH 


91 


we  can  nevertheless  hardly  deny  that,  so  far  as  it  results  from 
labour,  it  may  be  a form  of  investment  of  capital*. 

I 6.  There  are,  however,  other  immaterial  things,  such  as 
debts,  cop3Tights,  &c.,  which  being  (unlike  culture  and  skill) 
exchangeable,  are — as  we  saw — commonly  included  in  our  esti- 
mate of  the  wealth  of  individuals.  The  question  then  arises 
how  far  we  should  include  these  in  our  conception  of  the  aggre- 
gate wealth  of  the  community  ? We  will  take  first  the  case  of 
Debts.  A debt  may  be  regarded  either  as  the  creditor’s  Right 
to  receive  a certain  sum  of  money  or  as  a debtor’s  Obligation  to 
pay  it ; the  two  notions  merely  representing  two  opposite  views 
of  the  same  fact.  Such  a right  or  obligation,  being  transferable, 
is  a thing  that  possesses  a definite  exchange  value ; and  the 
least  reflection  will  shew  how  very  large  is  the  amount  of  these 
valuable  immaterial  articles  owned  by  Englishmen ; indeed  the 
greater  part  of  the  wealth  of  those  who  are  not  land-owners  or 
personally  engaged  in  business  consists  of  the  debts  owed  them 
by  governments,  companies,  bankers,  or  private  persons.  It  is 
clear,  however,  that  such  debts  would  not  be  properly  included 
in  an  inventory  of  the  aggregate  wealth  of  Englishmen,  except 
so  far  as  they  are  debts  of  foreigners ; since  whatever  be  the 
positive  value  of  a creditor’s  right  to  receive  money,  his  debtor’s 
obligation  to  pay  it  must  have  a corresponding  negative  value ; 
though  as  there  is  no  market  for  the  obligations  of  debtors,  as 
distinct  from  the  rights  of  their  creditors,  this  negative  value 
does  not  usually  force  itself  on  our  observation.  At  the  same 
time,  a well-organised  system  of  credit  increases  the  productive 
resources  of  a country,  just  as  a well-organised  system  of  railway 
communication  does ; and  this  effect  is  especially  striking  in  the 
case  of  certain  kinds  of  debts,  namely,  those  of  bankers  and 
merchants,  which  are  used  over  and  over  again  in  transfers  of 
wealth,  and  thus  come  to  be  a medium  of  exchange,  taking  the 
place  to  a large  extent  of  gold  coin.  And  so  far  as  such  debts  (or 
the  printed  or  written  acknowledgments  of  them)  serve  as  sub- 
stitutes for  the  precious  metals  in  the  machinery  of  exchange,  it 
would  be  misleading  to  include  the  latter  in  our  account  of 
a country’s  resources — or  producers’  wealth,  as  I have  called  it 
— and  reject  the  former:  for  if  a country  substitutes  an  ade- 
quate currency  of  banknotes  for  a portion  of  its  gold  currency, 

* See  c.  V. 


92 


POLITICAL  ECONOMY 


BOOK  I 


and  buys  goods  from  abroad  with  the  coin  saved,  it  is  evident 
that  its  power  of  obtaining  consumers’  wealth  has  been  increased 
by  the  change. 

In  fact,  in  estimating  for  purposes  of  comparison  the  wealth 
of  a community,  the  ordinary  standards  of  Quantity  and  Ex- 
change Value  are  peculiarly  inapplicable  to  the  portion  of 
wealth  used  as  a medium  of  exchange.  For  within  very  wide 
limits  the  function  of  money,  so  far  as  its  emplo;yTnent  within 
a country  is  concerned,  will  be  no  better  performed  by  a larger 
quantity  than  by  a smaller;  provided  that  our  habits  and 
customs  of  distribution  and  exchange  are  duly  adapted  to  the 
smaller  amount.  And  exchange  value  is  clearly  misleading 
when  the  medium  of  exchange  consists  partly  of  metallic  money 
and  partly  of  bankers’  debts ; for  while  the  actual  functions  of 
the  two  portions  are  the  same  so  long  as  the  coin  is  used 
within  the  country,  the  coin  has  the  special  utilities  of  being 
both  available  for  foreign  payments  and  capable  of  .being  melted 
down  and  turned  to  other  uses  without  any  considerable  loss. 
Hence^— while  it  would  be  absurd  to  deny  money  to  be  wealth 
— it  seems  to  me  most  convenient  to  omit  the  medium  of  ex- 
change altogether  in  our  comparisons  of  the  wealth  of  different 
societies  (or  of  the  same  society  at  different  times) ; and  to 
treat  it  as  something  sai  generis.  But  whether  we  do  this  or 
not  is  not  a question  of  great  importance,  for  the  purpose  of  our 
present  inquiry : provided  that  we  give  due  weight  to  the  dis- 
tinction before  dra^vn  between  ‘consumei’s’  commodities,’  whether 
material  or  immaterial,  and  ‘ producer’  wealth  ’ that  is  socially 
useful  only  as  a means  of  producing  consumers’  commodities ; 
since  the  medium  of  exchange  is  at  any  rate  to  be  considered  as 
producers’,  not  consumers’,  wealth,  and  is  therefore  to  be  esti- 
mated, from  a social  point  of  view,  by  its  productive  efficiency. 

For  a different  reason,  we  should  treat  similarly  the  other 
valuable  immaterial  things  which — as  was  before  said — are  com- 
monly and  rightly  included  in  our  estimate  of  the  wealth  of 
individuals.  Take,  for  example,  the  rights  to  prohibit  imitation 
of  one’s  inventions  and  literary  compositions  by  othem,  known 
as  Patents  and  Cop}Tights.  It  is  obvious  that  the  exchange 
value  of  such  things  is  no  guide  at  all  to  their  social  utility. 
The  primary  effect  of  patents  and  cop^Tights  is  generally  to 
decrease  the  amount  of  consumers’  wealth  produced  in  the 


CHAP.  Ill 


WEALTH 


93 


country.  The  utility  of  the  invention  on  which  the  patent  is 
based  may  be  very  great ; but  it  would  be  primd  facie  greater 
if  there  were  no  patent  at  all,  so  that  every  producer  might 
use  it  freely.  Still,  we  believe  that  the  ultimate  effect  of  the 
establishment  of  patent  rights  is  to  increase  the  stock  of  directly 
useful  commodities,  through  the  stimulus  given  to  inventive  ac- 
tivity. But  what  a country  gains  in  this  way  cannot  be  esti- 
mated with  quantitative  exactness,  any  more  than  what  it  gains 
by  other  important  differences  between  a good  and  a bad  system 
of  legislation ; and  it  would  be  manifestly  illusory  to  measure  this 
advantage  by  reckoning  the  average  exchange  value  of  patents. 

In  the  next  chapter  I shall  take  note  of  the  importance  to 
a country  of  its  political  organisation^  (including  its  system 
of  law)  as  a source  of  increased  production : but  this,  being 
common  to  all  members  of  the  community,  is  not  represented 
in  any  ordinary  commercial  estimate  of  the  wealth  of  indivi- 
duals. The  case  is  otherwise  with  certain  elements  of  that  more 
indefinite  and  spontaneous  social  organisation  which,  viewed 
as  a whole,  is  a hardly  less  indispensable  factor  in  the  actual 
production  of  the  aggregate  of  utilities  enjoyed  by  the  com- 
munity. The  established  relations  of  individual  traders  and 
professional  men  with  other  members  of  the  community,  who 
habitually  deal  with  them,  are  sources  of  gain  to  these  indi- 
viduals, admitting  of  more  or  less  definite  valuation.  This  is 
the  case  to  some  extent  even  with  relations  that  are  only 
partially  transferable ; as  the  Credit^  of  a banker  or  merchant, 

^ There  is  a certain  element  of  truth  in  the  fallacious  reasoning  by  which 
it  has  been  argued  that  our  national  debt  should  be  included  in  the  inventory  of 
England’s  wealth,  as  much  as  capital  sunk  in  land  or  railways ; as  the  interest 
paid  on  it  is  paid  for  the  use  of  money  which  has  been  thoroughly  well  invested 
in  rearing  the  historic  polity  of  which  we  enjoy  the  benefits. 

“Tantae  molis  erat  Romanam  condere  gentem,” 
and  the  “ civis  Romanus  ” has  naturally  to  pay,  like  the  shareholder  in  a 
railway,  for  the  borrowed  capital  used  in  this  great  construction.  The  analogy 
is  undeniable ; only  we  must  not  infer  that  England— any  more  than  a 
railway — is  worth  more  because  it  has  cost  us  so  much  ; still  less  that  it  is 
worth  more  because  we  had  to  borrow  the  money. 

^ I may  observe  that  in  discussing  the  case  of  bankers’  and  merchants’ 
obligations,  employed  as  a medium  of  exchange,  I have  avoided  the  term 
“credit,”  as  signifying  ambiguously  both  the  confidence  which  a creditor  feels 
in  his  debtor,  and  the  legal  obligation  to  pay  money  which  the  latter  incurs 
in  return  for  the  wealth  lent  him : it  is  in  the  former  of  these  meanings 
that  the  term  is  here  used. 


94 


POLITICAL  ECONOMY 


BOOK  I 


which  may  be  handed  on  through  the  continuity  of  a firm,  but 
cannot  be  exactly  sold  to  a successor.  In  a certain  sense  it  is 
legitimate  to  reckon  this  credit  as  a part  of  the  wealth  of  such 
a firm  since  it  is  certainly  a part  of  its  productive  resources,  of 
which  the  value  is  measurable  by  the  additional  profit  that  it 
enables  the  firm  to  obtain.  And  the  character  of  (an  individual’s) 
wealth  belongs  still  more  clearly  to  what  is  variously  known  as 
Practice,  Goodwill,  or  Connexion ; — terms  by  which  we  denote 
the  fact  that  a considerable  though  indeterminate  number  of 
persons  habitually  use  the  services  of  a particular  trader  or 
professional  man,  and  from  the  force  of  habit  will  mostly  con- 
tinue to  use  the  services  of  any  one  who  obviously  steps  into 
his  place.  Such  settled  habits  of  other  persons,  which  in  many 
industries  give  to  old-established  houses  a qualified  monopoly 
of  business,  are  of  course  a considerable  source  of  profit  to  the 
person  whose  services  are  employed ; and  so  far  as  such  goodwill 
is  capable  of  being  transferred  at  a definite  exchange  value,  it  is 
rightly  included  in  any  estimate  of  the  wealth  of  the  person 
enjoying  it.  And  no  doubt  the  establishment  of  certain  definite 
channels  of  business,  or  of  certain  fixed  habits  of  dealing  with 
particular  persons  and  companies,  is  a normal  element  of  social 
organisation  which  may  in  a certain  sense  be  regarded  as  a part 
of  the  productive  resources  of  the  community:  but  it  is  clear 
that  the  social  utility  of  this  system  of  economic  relations  cannot 
in  the  least  be  inferred  from  its  exchange  value. 

It  may  be  noticed  that  in  the  case  of  goodwill  or  business 
connexion  what  is  actually  bought  and  sold  is  commonly  the 
legal  right  of  using  the  name  (as  well  as  the  actual  buildings, 
&c.)  of  the  dealer  from  whom  the  goodvdll  is  purchased.  In 
the  case  of  a physician’s  practice,  however,  no  similar  external 
symbols  of  continuous  succession  are  exchanged ; what  the 
physician  undertakes  to  give  in  return  for  the  money  paid  him 
is  merely  his  absence  and  his  recommendation ; and  it  is  a re- 
markable illustration  of  the  force  of  mere  habit,  even  in  so 
important  a matter  as  the  choice  of  medical  advice,  that  this 
recommendation — even  when  currently  kno^^^l  to  have  been 
purchased — should  have  so  high  an  exchange  value  as  it  appears 
actually  to  possess.  But  in  neither  case  is  the  habit  of  dealing, 
on  which  the  profit  of  the  piirchase  depends,  really  secured  by 
any  legal  right.  I draw  attention  to  this  point,  because  even 


CHAP.  Ill 


WEALTH 


95 


in  the  case  of  patents,  copyrights,  &c.,  considered  as  portions  of 
an  individual’s  wealth,  it  does  not  appear  to  me  exactly  correct 
to  say  that  the  wealth  consists  in  the  legal  right ; but  rather 
that  it  consists  in  the  special  productive  advantage  or  utility, 
the  means  of  making  extra  profit,  which  is  derived  from  the  fact 
of  non-imitation,  though  secured  by  the  legal  right.  For  if  the 
legal  right  were  annihilated,  the  owner  of  the  patent  would  ob- 
viously remain  just  as  rich  as  before,  if  only  a general  habit  of 
non-imitation  could  be  maintained — by  public  opinion  or  other- 
wise— among  rival  producers*.  Similarly  in  the  case  of  any 
portion  of  material  wealth,  that  which  constitutes  a thing 
wealth  is  the  possibility  of  enjoying  the  utilities  or  satisfac- 
tions to  which  it  is  a means,  secured  to  its  owner  by  his 
legal  right  to  non-interference  on  the  part  of  others;  and  not 
this  right  itself.  Hence  in  considering  material  wealth,  though 
legal  ownership  is  presumed,  it  is  hardly  necessary  to  draw 
attention  to  it. 

We  have  now  examined  the  chief  questions  that  have  been 
raised  with  regard  to  the  definition  of  wealth.  The  results 
that  we  have  obtained,  so  far  as  they  are  important  at  the 
present  stage  of  our  investigation*’,  Avill  perhaps  be  most  con- 
veniently summed  up  at  the  outset  of  the  following  chapter. 

' I do  not  mean  to  suggest  that  this  supposition  is  within  the  limits  of 
probability. 

2 Some  further  discussion  of  Producers’  wealth — under  the  more  familiar 
name  of  Capital — will  be  found  in  Chapter  v. 


CHAPTER  IV. 


CAUSES  OF  VARIATIONS  IN  PRODUCTION. 

§ 1.  The  lengthy  discussion  in  the  preceding  chapter  wdll 
not,  I trust,  have  been  thrown  away,  if  it  has  assisted  us  in 
forming  a clearer  conception  of  the  object  that  we  have  in  \'iew, 
in  investigating  the  laws  or  conditions  of  Production.  The 
term  Wealth,  as  we  have  seen,  is  variously  used  in  ordinary 
discourse,  and  may  with  perfect  scientific  propriety  be  diversely 
defined  for  the  purpose  of  different  inquiries.  But  in  studvdng 
the  Wealth  of  Nations  what  we  are  concerned  to  know  is. 
Under  what  conditions  different  communities  of  men,  or  the 
same  communities  at  different  times,  come  to  be  “ better  or 
“ worse  supplied  with  all  the  necessaries  and  conveniences  for 
“ which  they  have  occasion  ” h Hence  our  attention  should  be 
concentrated  upon  those  directly  useful  commodities  which  I 
have  called  consumers’  wealth  to  distinguish  them  from  the 
instruments  and  materials  which  are  only  useful  and  valuable 
as  means  of  producing  other  wealth.  Again  in  comparing — 
with  any  aim  at  precision — the  supply  of  such  commodities 
enjoyed  by  different  communities,  or  the  same  community  at 
different  times,  we  must  limit  ourselves  to  cases  in  which  the 
primary  needs  of  the  persons  concerned  are  not  materially 
different.  Further  the  durability  of  a portion  of  consumers’ 
wealth  must  not  be  left  out  of  sight  in  estimating  the  com- 
munity’s command  over  the  “conveniences” — and  even  the 
“ necessaries  ” — of  life.  A man’s  house  does  not  the  less 
shelter  him  from  the  elements  because  it  was  built  in  the 
reign  of  Elizabeth ; and  if  we  ask  why  England  now  is  richer 

* Adam  Smith,  Introduction. 


CHAP.  IV  CAUSES  OF  VARIATIONS  IN  PRODUCTION 


97 


than  England  300  years  ago,  a part  of  the  answer  must  be 
that  each  generation  has  added  somewhat  to  the  stock  of 
such  durable  wealth  as  is  not,  except  accidentally,  destroyed 
in  the  using. 

At  the  same  time,  as  pointed -out  in  the  preceding  chapter, 
this  stock  of  wealth  requires  continual  expenditure  of  labour 
upon  it  in  various  ways ; and  it  is  often  convenient  to  neglect 
the  small  element  of  inherited  consumable  commodities  and 
consider  society  as  continually  supplying  what  it  continually 
consumes,  in  respect  of  the  comparatively  durable  part  of  its 
consumers’  wealth  no  less  than  of  that  which  is  rapidly  de- 
stroyed and  reproduced'.  But  we  must  not  forget  the  amount 
of  error  involved  in  this  limitation  of  view ; and  we  must  also 
bear  in  mind  that  carelessness  in  preserving  what  has  been  pro- 
duced, and  the  instability  of  taste  and  fashion  which  impairs 
the  satisfaction  derived  from  it,  tend  practically  to  reduce  the 
available  supply  of  commodities. 

Further;  I argued  that,  in  a complete  view  of  the  con- 
veniences of  life,  we  ought  to  consider  along  with  consumers’ 
wealth  what  I have  called,  for  analogy’s  sake,  “ consumable 
“ services  ” : and  I accordingly  propose  to  extend  the  terms 
“ produce  ” and  “ commodities,”  so  as  to  include  such  services  as 
well  as  material  products.  I also  pointed  out  that,  since  a 
portion  of  wealth  consists  of  books,  pictures,  microscopes,  and 
other  material  means  of  literary,  artistic,  and  scientific  culture, 
and  since  the  utilities  embodied  in  these  objects  cannot  be 
realised  except  by  persons  who  have  been  more  or  less  elabor- 
ately trained,  it  would  be  a mistake  for  us  to  leave  out  of  sight 
the  culture  that  results  from  this  training,  and  the  skill  that 
is  acquired  and  used  as  a source  of  immediate  enjoyment,  as  a 
private  person’s  skill  in  painting  or  piano-playing.  Though  we ' 
do  not  call  permanent  skill  and  culture,  any  more  than  trans- 
ient services,  by  the  name  of  wealth ; still,  since  they  resemble 
wealth  in  the  two  important  characteristics  of  being  results'of 
labour  and  sources  of  satisfaction,  the  economist  no  less  than 
the  statesman  or  the  philanthropist  must  keep  them  in  view,  in 

' As  will  be  seen,  a different  view  of  this  durable  consumers’  wealth  is 
attained  in  the  following  chapter,  in  which  its  analogy  to  producers’  capital  is 
brought  out;  but  the  difference  is  not  very  important  for  the  present  investiga- 
tion. 


S.  P.  E. 


7 


98 


POLITICAL  ECONOMY 


BOOK  I 


contemplating  the  growth  of  the  resources  of  refinement  and 
elevation  of  life  which  the  progress  of  civilisation  tends  to 
furnish  in  continually  increasing  abundance. 

At  the  same  time,  I pointed  out  a decisive  practical  reason 
for  not  including  any  reference  to  culture,  or  to  the  labour  by 
which  in  each  generation  it  is  developed  and  transmitted,  in 
our  present  examination  of  the  causes  why  different  societies 
are  better,  or  worse  supplied  with  commodities  generally:  \dz., 
that  the  most  important  changes,  that  we  have  to  note  and 
explain  in  society’s  command  over  material  wealth,  are  verj- 
different  in  their  nature  and  causes  from  the  most  important 
changes  that  have  taken  place  as  regards  the  possession  and 
enjoyment  of  culture.  Under  the  latter  head,  for  instance,  the 
varying  quality  and  abundance  of  the  services  of  painters,  poets, 
educators^  even  priests,  would  be  a prominent  object  of  investi- 
gation, and  would  obviously  take  us  into  regions  very  remote 
from  that  of  political  economy  as  ordinarily  understood.  The 
same  may  be  said  of  most  other  professional  services.  On  the 
other  hand,  it  would  be  equally  misleading  to  confine  our  view 
of  produce  to  the  material  things — food,  fuel,  clothing,  &c. — 
that  producers  are  continually  handing  over  to  consumers : since 
there  are  other  commodities,  not  transferred  in  a material  form, 
but  equally  derived  from  the  application  of  labour  to  matter,  of 
which  the  increased  supply  that  a modern  civilised  community 
continually  enjoys  is  due  to  causes  similar  to  those  that  have 
increased  its  command  over  material  commodities ; and  of 
which,  therefore,  the  production  is  naturally  and  suitably  con- 
sidered along  with  the  production  of  the  latter.  Such,  for 
example,  are  the  commodities  of  Conveyance  and  Correspon- 
dence ; — so  far  as  they  are  w^hat  I have  called  consumers’ 
commodities : i.e.,  so  far  as  railways  and  telegraphs  convey 
tourists  and  the  messages  of  friends,  no  less  than  goods, 
commercial  travellers,  and  messages  of  business*. 

The  “ produce,”  therefore,  of  which  we  are  to  examine  the 
variations  in  amount  must  be  conceived  as  something  of  which 
material  wealth  is  the  chief  but  not  the  sole  constituent.  For 

^ The  quantity  of  such  commodities  may  be  measured  by  (1)  the  number  of 
persons  and  messages  conveyed  within  a given  period,  and  (2)  the  space  through  ' 
which  they  are  conveyed : increased  speed  of  conveyance  is  an  improvement  in 
quality  which  can  only  be  roughly  estimated. 


CHAP.  IV  CAUSES  OF  VARIATIONS  IN  PRODUCTION 


99 


brevity’s  sake  it  will  be  convenient  sometimes  to  refer  to  it  as 
wealth : but  we  must  be  understood  to  have  in  view  all  the 
commodities  derived  from  the  application  of  the  labour  of  a 
society  of  human  beings  to  their  material  environment. 

According  to  the  ordinary  view  of  “ production  ” of  material 
products,  the  process  so  named  is  conceived  to  terminate  when 
the  portion  of  matter  to  which  it  is  applied  has  received  its 
final  quality  and  shape ; the  conveyance  and  sale  of  such 
finished  products  being  regarded  as  separate  and  subsequent 
processes.  Here,  however,  in  consistency  with  the  extended 
meaning  which  I gave  to  the  term  “ produce,”  we  must  regard 
as  “ productive  ” all  the  labour  employed  about  a thing  until  its 
consumption  commences : that  is,  we  must  include  the  labour 
of  carriers  and  traders,  no  less  than  that  of  farmers  and  manu- 
facturers. 

I 2.  The  fundamental  questions,  then,  which  the  Theory 
of  Production  attempts  to  answer,  may  now  be  precisely  stated 
as  follows : (1)  What  are  the  causes  that  make  the  average 
annual  produce  per  head^  of  a given  community  at  a given 
time  greater  than  that  of  another  whose  primary  wants  are 
not  materially  different,  or  greater  than  its  own  produce  at  a 
previous  stage  of  its  history;  and  (2)  What  are  the  laws  of 
their  operation  ? The  answer  to  the  former  of  these  questions 
is  somewhat  complicated,  but  in  no  way  doubtful  or  obscure : 
it  merely  requires  a little  care  in  reflective  analysis  to  dis- 
tinguish the  different  elements  that  enter  into  the  productive- 
ness of  industry;  though  their  mutual  connexion  is  so  close 
and  intricate  that  it  is  a matter  of  some  little  difficulty  to 
expound  them  in  a clear  order.  But  when  we  attempt  to 
measure  accurately  the  operation  of  any  of  these  causes  in 
the  past,  and  still  more  when  we  try  to  forecast  the  extent 
to  which  they  may  be  expected  to  operate  in  the  future,  ,we 
touch  on  points  which  controversy  has  found — or  rendered 
— difficult  and  perplexing.  It  has,  therefore,  seemed  to  me 

* We  investigate  the  average  supply  per  head,  and  not  the  total  supply; 
because  it  is  to  the  former  that  all  assertions  as  to  the  greater  or  less  wealth  of 
a society  commonly  relate, — we  do  not  think  that  a nation  has  grown  richer 
merely  because,  having  grown  larger,  it  consumes  more  food,  clothing,  <tc. 
And  we  take  the  supply  as  annual,  because  the  principal  products  of  agriculture 
are  actually  produced  at  intervals  of  about  a year;  otherwise,  of  course,  any 
other  period  would  do  equally  weU. 


7—2 


100 


POLITICAL  ECONOMY 


BOOK  I 


desirable  to  treat  these  two  questions  separately ; and  to 
confine  myself  in  the  jjresent  chapter  to  a merely  qualitative 
analysis  of  the  conditions  of  Production,  reserving  for  a future 
chapter  the  discussion  of  the  more  precise  quantitative  state- 
ments, which  for  distinctness’  sake  I propose  to  call  the  ‘ Law’s  ’ 
of  Production.  The  present  economic  condition  of  society  and 
its  recent  history  will  be  kept  primarily  in  view:  the  same 
analysis  is,  however,  in  some  measure  applicable  to  all  human 
societies. 

Production,  as  here  viewed,  may  be  defined  as  the  applica- 
tion of  the  labour  of  a community  to  adapt  external  matter, 
organic  or  inorganic,  to  the  satisfaction  of  its  w^ants;  and  the 
whole  process  has  various  degrees  of  complexity  according  to 
the  nature  of  the  utility  produced.  Ordinarily,  we  can  dis- 
tinguish three  chief  stages  involving  a somew’hat  larger  number 
of  leading  species  of  industry.  First  comes  the  labour  required 
to  get  possession  of  some  material  thing  in  its  natural  state,  or 
with  no  further  modification  than  is  needed  to  render  it  move- 
able  : i.e.,  either  mainly  the  labour  of  pursuit  or  enticement 
and  capture,  e.g.,  of  game  or  fish,  or  mainly  the  labour  of 
initiating  or  fostering  the  natural  gi’owfih  of  tame  animals  and 
vegetables,  or  the  labour  of  detachment  or  extraction,  as  in  the 
case  of  forest  trees  and  minerals.  Then  follow’s  the  labour  of 
manufacture  in  w’hich  this  raw’  material  undergoes  mechanical 
or  chemical  changes  more  or  less  extensive  to  adapt  it  to 
human  uses : then,  finally,  comes  the  labour  of  the  carriers  w’ho 
convey  the  finished  goods  from  place  to  place,  and  of  the  traders 
w'ho  enable  them  to  be  obtained  promptly  and  easily  by  the 
members  of  the  community  who  may  from  time  to  time  require 
them.  It  is  evident  that,  for  a given  population,  this  whole 
process — or  any  part  of  it — will  tend  to  peld  more  or'  less 
of  the  utilities  at  which  it  aims,  according  as  the  labour  is 

(i)  applied  under  more  or  less  favourable  circumstances,  or 

(ii)  is  greater  in  quantity,  or  (iii)  more  efficient  in  quality. 
The  term  labour  is  here  used  to  include  all  kinds  of  voluntan- 
exertion,  intellectual  as  w’ell  as  muscular,  w’hich  contributes 
directly  or  indirectly  to  the  increase  of  produce  as  above 
defined:  and  by  “quantity  of  labour”  is  meant  merely  ex- 
tensive quantity,  measured  in  two  w’ays,  by  length  of  time 
and  number  of  labourers.  On  this  view-  we  may  distinguish 


CHAP.  IV  CAUSES  OF  VARIATIONS  IN  PRODUCTION 


101 


four  different  ways  in  which  the  labour  of  one  community 
may  be  less  than  the  labour  of  another,  in  proportion  to  the 
whole  number  of  the  population;  for  either  the  workers  may 
bear  a smaller  ratio  to  the  non-workers,  or  the  number  of  years 
during  which  they  work  may  bear  a smaller  ratio  to  the  whole 
period  of  life,  or  they  may  work  for  fewer  days  in  the  year,  or 
for  fewer  hours  in  the  day.  We  might  further  regard  labour  as 
having  intensive  as  well  as  extensive  quantity,  since  we  com- 
monly speak  of  men  as  doing  more  or  less  work  in  the  same 
time,  meaning  not  merely  that  they  produce  more  or  less 
result,  but  that  they  make  more  or  less  effort : but  since  I 
cannot  find  any  satisfactory  measure  of  the  amount  of  such 
effort,  applicable  to  all  kinds  of  labour  alike,  it  seems  best 
to  include  this  source  of  variation  under  the  third  head  of 
“ efficiency  ” of  labour.  The  question  is  not  of  great  practical 
importance ; because  the  variations  in  quantity  and  quality  of 
labour  respectively  are  on  any  view  largely  due  to  the  same 
causes  h 

§ 3.  Let  us  begin,  then,  by  analysing  briefly  the  differences 
in  the  productiveness  of  labour  that  are  due  to  external  condi- 
tions. In  the  first  place,  the  “ spontaneous  bounties  of  nature  ” 
(as  they  are  called)  are  very  unequally  distributed : in  some 
regions  things  directly  consumable,  or  the  materials  required 

1 Jevons,  in  his  Theory  of  Political  Economy  (c.  v.),  considers  labour  as 
possessing  intensive  quantity  : but  his  view  of  this  characteristic  does  not 
appear  to  me  very  clear  or  consistent.  In  one  passage  (p.  185,  2nd  ed.)  he  says 
that  “ intensity  of  labour  may  have  more  than  one  meaning ; it  may  mean  the 
“quantity  of  work  done,  or  the  painfulness  of  the  effort  of  doing  it.”  But 
surely  “quantity  of  work  done” — or,  as  he  afterwards  says,  “amount  of 
“ produce”— varying  as  it  must  with  the  material  to  which  the  labour  is  applied, 
the  skill  with  which  it  is  directed,  the  instruments  that  aid  it,  &c.,  Ac.,  cannot 
possibly  measure  the  mere  quantity  (in  any  sense)  of  the  labour.  And  though 
the  “ painfulness  ” of  labour  is  a characteristic  of  fundamental  economic 
importance,  it  cannot  possibly  supply  a universal  measure  of  labour ; since,  as 
I have  already  argued,  the  assumption  that  labour  is  universally  painful  is  in 
conflict  with  facts. 

In  another  passage  (p.  221)  Jevons  says  that  “ we  may  approximately 
“ measure  the  intensity  of  labour  by  the  amount  of  physical  force  undergone 
“ in  a certain  time.”  This  view  appears  to  me  quite  different  from  the  one  just 
discussed;  since  by  “amount  of  physical  force  undergone”  must  be  meant 
some  effect  on  the  labourer’s  organism,  not  on  the  material  modified  by  his 
labour.  But  what  the  precise  nature  of  this  organic  effect  is,  or  by  what 
standard,  applicable  to  all  kinds  of  labour  alike,  Jevons  proposes  to  measure 
it,  I cannot  discover  from  his  examples. 


102 


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for  making  them — game  or  fish,  wood  or  coal  for  fuel,  or  useful 
metals — are  much  more  abundant  than  elsewhere,  or  more 
easily  obtained,  preserved,  or  applied  to  their  appropriate  uses. 
These  variations  are  obvious  and  familiar;  and  almost  equally 
obvious  are  the  differences  in  the  degrees  in  which  land  and 
water,  the  great  permanent  instruments  of  production  (in- 
cluding conveyance),  are  naturally  adapted  for  this  purpose 
or  capable  of  being  made  so.  It  should  be  observed,  however, 
that  these  material  advantages  do  not  remain  the  same  in  all 
stages  of  industrial  development : but  vary  with  the  varying 
amounts  of  labour  applied  and  the  varjdng  efficiency  of  instru- 
ments and  processes.  Thus  in  newly  settled  countries  the  lands 
first  cultivated  are  commonly  not  those  that  ultimately  prove 
the  most  fertile : so  again  the  river-system  of  a country  is 
fundamentally  important  for  communication  till  railways  are 
introduced,  but  not  afterwards : and  similarly  the  ocean  was 
long  a barrier  to  navigators  of  inland  seas. 

Secondly,  as  we  pass  from  one  part  of  the  earth’s  surface  to 
another,  we  find  similar  variations  in  the  conditions  unfavour- 
able to  production  or  to  the  preservation  of  what  has  been 
produced:  either  periodic  conditions  of  inorganic  nature  such 
as  extreme  dampness*  or  extreme  heat;  or  occasional  disturb- 
ances as  floods,  storms,  earthquakes,  &c. ; or  plants  or  insects 
noxious  in  various  ways.  Here  also  we  may  notice  (1)  the 
direct  physical  effect  of  climate  on  the  labourer’s  energ}-,  as 
well  as  (2)  its  effects  in  varying  the  period  during  which 
labour  can  be  usefully  employed  in  agriculture^. 

In  short,  the  external  world  upon  which  man  operates 
requires  in  its  original  state  ver)'  different  degrees  of  adapta- 
tion to  extract  from  it  the  same  quantum  of  utility  for  human 
needs.  We  have  now  to  observe  that,  in  the  regions  of  the 
earth  which  have  been  for  some  time  in  the  possession  of 

1 “During  the  rainy  reason,  in  the  region  of  the  upper  Ganges,  mushrooms 
“shoot  up  in  every  corner  of  the  houses;  books  on  shelves  swell  to  such  an 
“ extent  that  three  occupy  the  place  previously  occupied  by  four  ; those  left  on 
“ the  table  get  covered  over  with  a coat  of  moss  one-eighth  of  an  inch  in  thick- 
“ ness.”  Koscher,  Political  Economy  (Lalor’s  translation),  § cux. 

“ In  the  countries  on  the  Danube,”  says  Professor  Hearn  (Plutology, 
pp.  74,  75),  “the  cultivation  of  the  ground  and  the  reaping  of  the  crop  are 
“spread  over  seven  months;  in  the  countries  on  the  north  of  the  Volga  they 
“ must  be  concluded  in  four  months.” 


CHAP.  IV  CAUSES  OF  VARIATIONS  IN  PRODUCTION 


103 


civilised  man,  each  succeeding  generation  receives  its  portion 
of  the  earth’s  surface  in  a somewhat  different  condition  froiu 
the  preceding  generation.  For  the  most  part  it  finds  its  in- 
heritance in  a state  more  favourable  to  labour;  the  benefits 
of  its  predecessor’s  work  being  inextricably  mingled  with  the 
“ spontaneous  bounties  ” of  nature.  These  benefits  may  have 
been  to  some  extent  intentional,  as  when  men  plant  trees  that 
their  children  may  reap  the  fi-uits ; but  in  the  main  each 
generation  carries  on  primarily  for  its  own  ends  the  process 
which,  from  a human  point  of  view,  we  may  call  the  “ improve- 
“ ment  ” of  the  external  world ; only  a considerable  part  of  this 
improvement,  being  permanent  in  its  nature,  profits  posterity 
as  much  as  the  improvers  themselves.  The  later-bom  genera- 
tion finds,  along  with  fields  originally  fertile,  others  that  have 
become  so  through  labour  spent  in  clearing  and  draining,  em- 
bankments to  ward  off  floods,  tanks  or  canals  for  irrigation,  &c. 
It  finds  that  the  beasts  of  prey  that  used  to  inhabit  its  land  are 
either  extinct,  or  reduced  in  numbers  and  scared  from  the  haunts 
of  men.  It  finds  rivers  made  navigable  and  fi-eed  from  “ snags 
“and  rafts,  rapids  and  shallows,”  harbours  made  more  commo- 
dious, roads  and  railroad  levels  constructed.  To  maintain  some 
of  these  improvements  will  require,  no  doubt,  some  labour  of  its 
own;  but  indefinitely  less  labour  than  was  required  for  their 
original  construction.  So  again,  it  finds  species  of  plants  and 
animals  which  by  continued  cultivation  or  by  taming  and  gradual 
breeding  have  been  rendered  more  fit  than  they  originally  were 
for  the  satisfaction  of  human  wants.  This  improvement,  also, 
is  not  strictly  speaking  permanent ; it  might  conceivably  be 
lost : but  it  is  not  likely  to  be  lost  without  a social  catastrophe, 
and,  generally  speaking,  it  does  not  entail  any  additional  labour 
on  the  generation  that  succeeds  to  it. 

On  the  other  hand,  we  have  to  notice  certain  respects  in 
which  the  earlier  generations  are  liable  to  render  the  land 
they  live  in  worse  adapted  for  the  requirements  of  their  suc- 
cessors. They  tend  to  exhaust  the  useful  minerals  that  are 
most  conveniently  situated  for  extraction,  and  also  certain 
useful  organic  products  accumulated  in  previous  ages,  such  as 
Peruvian  guano.  They  may  exhaust  the  fertility  of  certain 
soils  by  frequent  crops,  so  that  these  soils  will  afterwards 
require  more  labour  to  render  them  as  fertile  as  they  ’ ^ere 


104 


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originally.  They  tend  to  diminish  the  number  of  useful  wild 
animals  and  drive  them  into  places  where  they  are  more 
difficult  to  catch ; and  to  carry  the  clearing  of  forests  beyond 
the  point  at  which  the  tree  is  less  useful  than  the  ground  on 
which  it  stands.  But  these  and  other  similar  deteriorations, 
so  far  as  we  have  yet  had  experience  of  them,  cannot  be  said 
to  weigh  heavily  in  the  balance  against  the  improvements 
before  mentioned. 

There  is,  however,  one  specially  important  way  in  which 
a generation  may  find  itself  with  a material  environment  less 
adapted  to  its  needs,  through  the  action  of  its  predecessors. 
It  may  find  that,  through  the  increase  in  its  numbers,  the 
country  it  inhabits  has  become  too  small  for  the  most  ef- 
fective application  of  the  aggregate  of  its  labour;  that  is, 
the  increase  in  the  advantages  of  division  of  employments 
(to  be  presently  noticed)  may  be  more  than  neutralised  by 
the  diminution  in  the  proportional  amount  of  agricultural 
produce  that  can  be  annually  extracted  from  the  land,  in 
return  for  the  extra  labour  applied  to  it'. 

Further,  we  have  to  observe  that  the  gifts  of  nature  are 
only  useful  so  far  as  they  are  known ; and  that  our  know- 
ledge of  them  has  continually  increased.  As  civilisation  pro- 
gresses, men  discover,  or  enter  into  effective  communication 
with,  regions  unknown  to  their  ancestors, — I'egions  containing 
new  useful  plants  and  animals  whose  products  they  may 
appropriate  by  exchange ; they  discover  new  possibilities  of 
acclimatising  foreign  plants  and  animals  already  known  ; the}^ 
find  new  minerals  in  their  own  land.  Xew  combinations  of 
matter,  again,  are  accidentally  produced  in  the  development 
of  industries,  which  are  afterwards  ascertained  to  possess  un- 
expected utilities.  To  a still  larger  extent  useful  properties 
previously  unknown  or  almost  unknown  are  discovered  in 
things  already  known,  or  new  modes  of  combining  properties 
already  known  so  as  to  increase  their  utility.  In  all  these 
ways  the  available  bounties  of  nature  come  to  be  continually 
increased,  by  the  progress  of  knowledge,  for  each  successive 

' To  what  extent  and  under  what  conditions  this  tends  to  occur  are 
fundamentally  important  questions  which  we  shall  have  to  consider  carefully 
when  we  come  to  discuss  the  Law  of  Diminishing  Returns  in  chapter  vi.  of  this 
Book. 


CHAP.  IV  CAUSES  OF  VARIATIONS  IN  PRODUCTION 


105 


generation.  Here  again  the  improvement  is  not  absolutely 
permanent ; it  may  be  lost  through  the  intellectual  inertness 
of  the  later-born  inhabitants ; indeed,  like  some  of  the  ma- 
terial improvements  before-mentioned,  it  requires  a continual 
expenditure  of  labour  to  maintain  it.  But  this  expenditure 
is  trifling  in  comparison  with  the  utility  of  its  results ; and 
is  not  likely  to  be  pretermitted  by  any  civilised  society  in 
its  normal  condition. 

§ 4.  In  dealing  with  the  first  class  of  conditions  of  variable 
productiveness,  I have  been  led  to  include  one  that  might 
equally  be  placed  in  the  third  class.  For  the  increase  of  our 
knowledge  of  matter  and  its  properties,  taking  effect  in  what 
we  call  Inventions  of  new  industrial  processes,  is  properly  re- 
garded as  one  of  the  most  important  causes  of  improvement 
in  the  efficiency  of  human  labour.  In  another  respect,  again, 
the  distinction  above  drawn  between  improvements  in  Man  and 
in  Nature,  though  on  the  v/hole  convenient,  is  somewhat  forced. 
P'or  Man  is  a part  of  Nature;  the  productive  qualities  of  man, 
no  less  than  those  of  plants  and  animals,  exhibit  differences 
that  are,  relatively  speaking,  original — that  is,  of  which  the 
origin  is  lost  in  prehistoric  obscurity ; and  at  the  same  time 
they  are  similarly  susceptible  of  improvements  that  may  be 
transmitted  through  physical  heredity.  This  is  true  not  only 
of  such  qualities  as  strength,  energy,  fineness  of  sense,  &c., 
but  also  of  higher  intellectual  aptitudes. 

Again,  as  we  have  already  seen,  both  the  quantity  and  the 
quality  of  labour  are  directly  affected  by  climatic  influences, 
which  render  the  labourer  himself  languid  and  inert,  or  render 
important  kinds  of  work  impossible  for  him  at  certain  periods. 

Passing  from  these  conditions,  which  are  in  the  main  un- 
alterable, we  may  notice  variations  in  the  quantity  and  personal 
efficiency  of  labourers  which  depend  on  such  physical  and  social 
circumstances  of  the  labourers’  lives  as  admit  of  being  at  any 
time  modified  by  the  action  either  of  individuals  or  of  the 
society  to  which  they  belong.  In  the  first  place,  it  is  obvious 
that  the  proportion  of  effective  workers  to  the  rest  of  the 
community  will  be  less,  other  things  being  equal,  where  the 
population  is  increasing  rapidly,  owing  to  the  larger  number  of 
children  that  have  to  be  supported ; it  will  be  less,  again, — for 
any  given  rate  of  increase  of  adult  population, — the  greater  the 


106 


POLITICAL  ECONOMY 


BOOK  I 


number  of  children  that  die  in  infancy,  owing  to  want  of  care 
or  want  of  proper  food,  clothing,  &c.  Again,  unsanitary  con- 
ditions of  life  tend  in  another  way  to  reduce  the  quantity  of 
labour  performed  by  a given  population ; by  diminishing, 
through  premature  death  or  early  and  prolonged  decrepitude, 
the  average  proportion  which  the  working  period  of  life  bears 
to  the  whole ; and  again,  by  diminishing  the  number  of  working 
days  in  the  year,  through  increased  frequency  of  incapacitating 
disease. 

Similarly,  bad  air  and  water,  uncleanliness,  over-indulgence 
in  alcohol  and  other  unhealthy  habits  may  lower  the  physical 
tone  of  the  labourer  and  thus  impair  the  quality  of  his  work 
without  causing  positive  illness ; on  the  other  hand,  the  strength 
and  energy  of  the  labourer  may  be  largely  increased  by  an 
ampler  supply  of  the  necessaries  of  life\ 

Even  more  important  than  the  differences  in  the  physical 
strength  and  vigour  of  labourers  are  the  variations  that  we  find 
in  their  skill  and  intelligence,  their  foresight,  quickness,  vigi- 
lance, and  resource  in  availing  themselves  of  advantages  that 
further  production,  and  avoiding  or  removing  all  that  impairs  it. 
Superiorities  in  these  respects  are  partly,  as  I have  said,  con- 
genital and  transmitted  through  physical  heredity:  but  to  a 
great  extent  they  are  handed  down  from  generation  to  genera- 
tion by  conscious  training  and  learning ; primarily  by  technical 
training  and  learning  of  special  arts  and  processes,  hut  also  to 
an  important  extent  by  association  and  unconscious  imitation. 
“ The  child,”  says  Mr  F.  A.  Walker,  “ becomes  a better  workman 
“ simply  by  reason  of  being  accustomed,  through  the  years  of  his 
“ own  inability  to  labour,  to  see  tools  used  with  address,  and 
“ through  watching  the  alert  movement,  the  prompt  co-opera- 
“ tion,  the  precise  manipulation,  of  bodies  of  workmen.  The 
“ better  part  of  industrial  as  of  every  other  kind  of  education  is 
“ unconsciously  obtained.  And  when  the  boy  is  himself  appren- 
“ ticed  to  a trade,  or  sets  himself  at  work,  he  finds  all  about  him 
“ a thorough  and  minute  organisation  of  labour  which  conduces 
“ to  the  highest  production ; he  has  examples  on  every  side  to 
“ imitate ; if  he  encounters  special  obstacles,  he  has  only  to 

1 Hence — as  we  shall  afterwards  notice — differences  in  cost  of  labour  to 
employers  are  often  much  slighter  than,  and  sometimes  even  in  opposite  direc- 
tion to,  differences  in  the  labourers’  remuneration. 


CHAP.  IV  CAUSES  OF  VARIATIONS  IN  PRODUCTION 


107 


“stop,  or  hardly  even  to  stop,  to  see  some  older  hand  deal 
“ with  the  same  ” This  unconscious  imitation  operates  power- 
fully in  ke-^ping  up  the  habitual  energy  of  individuals  in  a 
society  when  a high  average  standard  of  energetic  work  is 
maintained. 

§ 6.  Still,  in  explaining  differences  in  the  degree  of  energy 
of  individual  labourers  or  groups  of  labourers,  as  well  as  dif- 
ferences in  the  (extensive)  quantity  of  the  labour  performed 
by  a given  population,  a chief  place  must  be  given  to  differ- 
ences in  the  strength  of  the  motives  for  work  presented  to 
their  minds. 

Among  these  varying  motives  the  most  powerful  is  un- 
doubtedly that  “ desire  for  wealth  ” which  economists  have 
often  treated  as  the  sole  possible  spring  of  industrial  activity. 
In  a previous  chapter^  I have  argued  that  the  very  fact  that 
this  desire  is  derived  from,  or  is  a generalised  form  of,  an 
indefinite  number  of  more  particular  impulses,  renders  it  prac- 
tically legitimate  to  assume  its  universal  presence ; since  there  is 
at  least  no  important  class  of  persons  who  do  not  desire,  either 
for  their  own  present  satisfaction,  or  as  provision  for  the 
future,  or  for  donation  or  bequest  to  others,  a larger  supply 
of  some  kind  of  purchaseable  commodity.  None  the  less  is  it 
important  to  observe  the  different  degrees  of  intensity  in  which 
the  desire  of  wealth  actually  operates,  in  consequence  of  vari- 
ations in  the  strength  of  the  more  particular  impulses  from 
which  it  is  derived  or  generalised.  Of  these  the  most  universal 
and  imperious  are  the  primary  wants  of  food,  clothing,  shelter, 
and  other  necessaries.  These  primary  needs,  as  we  have  al- 
ready observed,  are  considerably  modified  by  differences  of 
climate  and  of  the  physical  constitution  of  different  races ; and 
also  somewhat  by  the  traditional  habits  of  different  communi- 
ties and  classes.  But  even  assuming  them  to  be  approximately 
uniform,  the  amount  of  labour  required  for  their  satisfaction 
must  obviously  be  affected  by  changes  in  the  productiveness 
of  labour;  and  the  stimulus  to  labour  supplied  by  them  will 
vary  accordingly.  Hence  improvements  in  production,  of  which 
the  benefit  accrues  to  the  labourers,  have  some  tendency  to 
cause  a diminution  in  the  quantity  of  labour  instead  of  an 
increase  in  the  quantity  of  produce : since  if  a man’s  earnings 
* The  Wages  Question,  c.  3.  ^ Introduction,  c.  3. 


108 


POLITICAL  ECONOMY 


BOOK  I 


are  already  sufficient  to  satisfy  all  his  keenly  felt  needs,  the 
power  of  earning  more  by  the  same  amount  of  labour  must 
partly  operate  as  an  inducement  to  work  less. 

It  is,  no  doubt,  a general  characteristic  of  human  nature, 
that  when  these  primary  needs  are  satisfied,  other  desires  re- 
quiring more  or  less  wealth  for  their  gratification  tend  to  be 
developed,  and  to  fill  up  the  vacuum  of  impulse  thus  created. 
But  the  strength  of  these  secondary  impulses,  as  compared  "with 
the  aversion  to  additional  labour  which  acts  as  a counterforce, 
is  a far  more  vaiiable  element  than  the  urgency  of  the  primar}' 
needs.  The  sensibility  to  “comforts,”  or  the  means  of  warding  off 
slighter  physical  annoyances  ; the  taste  for  sensuous  “ luxuries,” 
that  is,  for  the  means  increasing  the  positive  pleasures  that 
normally  attend  the  satisfaction  of  physical  wants,  by  variety 
and  elaborateness  in  food,  drink,  furniture,  «Src. ; the  taste  for 
ornament,  elevated  gradually  into  artistic  sensibility ; the  de- 
mand for  the  emotional  and  intellectual  gratifications  furnished 
by  literature,  science,  <fec. ; — all  these  springs  of  action  are 
operative  in  very  various  degrees  in  different  communities  and 
classes  at  different  periods  of  their  historj*.  The  progi'ess  of 
civilisation  tends  generally  to  increase  their  force — in  fact  such 
increase  is  implied  in  our  common  notion  of  the  complex 
change  that  we  call  “ progress  of  civilisation  ” — but  the  tendency 
is  not  uniform  in  kind  or  degree.  Foreign  trade  has  historically 
been  a most  powerful  and  important  agent  in  the  diffusion  of 
these  secondary  desires it  is,  indeed,  noteworthy  that  the  ad- 
vantage of  foreign  trade,  which  was  most  prominent  in  the  view 
of  pre-Smithian  economists  of  the  eighteenth  century,  was  not 
that  it  tends  to  supply  more  amply  and  economically  needs  and 
desires  already  existing ; but  rather  that  it  “ rouses  men  from 
“ their  indolence,  and  presenting  the  gayer  and  more  opulent 
“ part  of  the  nation  with  objects  of  luxury  which  they  never 
“ heard  of  before,  raises  in  them  a desii’e  of  a more  splendid 
“way  of  life  than  their  ancestor  enjoyed  ”h  The  influence 
of  these  desires  as  developed  in  individuals  ^is  further  modified 
by  the  varying  extent  and  manner  in  which  custom  and 
social  sentiment  intervene ; either  as  prescribing  certain  com- 
forts or  luxuries  as  “ decencies  ” of  life  in  certain  classes,  or 
as  stimulating  efforts  to  rise  above  the  standard  socially 
' Hume,  Essay  on  Commerce. 


CHAP.  IV  CAUSES  OF  VARIATIONS  IN  PRODUCTION 


109 


prescribed  in  any  class,  in  order  to  gain  the  higher  social 
rank  or  reputation  attached  to  the  possession  or  exhibition  of 
wealth ; or,  on  the  other  hand,  as  reprobating  luxury  generally 
or  particular  species  of  luxurious  expenditure.  We  have  further 
to  take  into  account  the  varying  operation  of  the  affections, 
which  multiply  the  attractive  force  of  all  objects  of  desire  by 
extending  the  range  of  the  persons  for  whom  they  are  desired ; 
and  the  play  of  the  moral  sentiments  which  variously  combine 
with  natural  affections  in  prompting  to  such  extension — thus,  for 
example,  the  provision  of  wealth  for  children  is  an  end  sought 
with  very  different  degrees  of  eagerness  by  average  persons  at 
different  times  and  places.  Nor  must  we  neglect  the  influence 
of  the  political  organisation  of  the  community,  in  rendering 
political  power  more  or  less  dependent  on  the  possession  of 
wealth.  Finally,  the  resultant  force  of  this  complex  play  of 
motives  is  of  course  affected  by  any  variations  in  the  average 
dislike  of  labour ; in  considering  which  we  may  especially  notice 
the  powerful  effect  of  social  sentiments  and  opinions ; labour 
generally,  or  certain  kinds  of  labour,  having  frequently  been 
regarded  as  more  or  less  degrading. 

But  the  stimulus  given  to  labour  by  the  desire  for  wealth 
does  not  vary  simply  according  to  the  strength  of  this  resultant 
impulse ; it  is  modified  at  least  equally  by  the  extent  to  which 
the  labourer  is  impressed  with  the  belief  (1)  that  additional 
wealth  may  be  obtained  and  kept  by  additional  labour,  and 
(2)  that  there  is  no  other  more  easy  and  agreeable  way  of 
obtaining  it.  Here  it  is  to  be  observed,  in  the  first  place, 
that  the  range  of  opportunities  of  obtaining  wealth  has  been 
largely  extended  and  restricted  by  the  varying  action  of  govern- 
ments. What  political  conditions  are  most  effective  in  securing 
the  proportionment  of  reward  to  labour  is  a much  controverted 
question,  which  will  demand  our  consideration  laterf  But 
there  is  no  question  that  this  security  has  often  been  impaired 
by  the  fact  that  adequate  protection  of  earnings  from  spoliation 
has  not  been  provided — as  Mill  epigrammatically  says — “ by 
“ the  government  and  against  the  government.”  Lack  of 
protection  by  the  government  obviously  involves  the  double 
detriment  of  discouraging  honest  labour,  and  encouraging  the 
socially  unproductive  industry  of  plundering  others, — effects 
^ See  Book  III.  cc.  iii.  and  iv. 


no 


POLITICAL  ECONOMY 


BOOK  I 


which  are  aggravated  when  the  plunderers  are  armed  with, 
or  sheltered  by,  the  authority  of  government ; but  “ protection 
“against  the  government”  must  be  understood  to  include 
security  not  merely  against  the  arbitrary  seizure  of  property, 
but  also  against  such  oppressive  taxation  as  discourages  the 
accumulation  of  wealth. 

On  the  other  hand,  there  is  equally  little  question  that  the 
well-intentioned  tutelage  of  government  has  often  gone  too  far; 
that,  for  example,  in  civilised  Europe  in  the  eighteenth  century 
the  opportunities  of  obtaining  wealth  were  seriously  diminished 
by  the  restraints  which  governments  imposed  on  free  choice  of 
domicile  and  calling,  and  on  the  processes  of  industrj^  and 
trade ; or  again  that  the  sustenance  gratuitously  provided  for 
non- workers,  by  the  English  Poor-law  from  1782  to  1823, 
dangerously  impaired  the  motives  to  industry.  This  latter 
effect  may  of  course  also  be  produced  by  indiscriminate  private 
almsgiving  without  the  intervention  of  government.  And 
similarly  even  when  the  government  leaves  individuals  perfect 
freedom  in  the  choice  of  calling  and  domicile,  the  want  of 
“ mobility  ” in  the  labour  of  the  community  may  seriously  in- 
terfere with  its  productiveness ; ignorance,  or  routine,  or  social 
sentiment,  or  strong  local  attachment  may  prevent  workers 
from  choosing  the  business  in  which  their  exertions  would  be 
most  productive  and  best  remunerated. 

Supposing  the  species  of  industry  determined,  the  strength 
of  the  labourer’s  motive  to  exertion  and  care  depends,  of  course, 
partly  on  the  amount  of  his  earnings;  but  partly  also  on  the 
connexion  between  his  earnings  and  his  efforts;  and  this, 
again,  varies  greatly  with  the  mode  in  which  industry*  is 
organised.  The  connexion  is  most  simply  effective  when  a 
labourer  works  independently  and  owns  the  whole  produce 
of  his  labour.  So  far  as  this  simple  arrangement  is  pre- 
cluded by  its  incompatibility  with  the  full  advantages  of 
co-operation,  the  labourer’s  interest  in  production  has  to  be 
secured  by  some  artificially  contrived  correspondence  between 
his  remuneration  and  his  work.  Different  arrangements  for 
attaining  this  result  will  be  presently  considered ; here  we  need 
only  observe  that  the  deficiency  of  stimulus  in  the  case  of  a 
hireling  who  works  for  a fixed  wage  may  be  partially  supplied 
by  careful  supervision,  if  his  wages  can  be  easily  raised  or 


CHAP.  IV  CAUSES  OF  VARIATIONS  IN  PRODUCTION 


111 


lowered  at  his  employer’s  will,  and  if  the  competition  for  work 
among  labourers  is  keen.  Hence,  distinguishing  the  work  of 
employed  labourers  generally  from  that  of  their  manager 
(whether  the  employer  or  his  agent),  we  may  draw  attention  to 
the  special  importance  of  adequate  motives  for  exertion  and 
care  in  the  case  of  the  latter:  not  merely  because  skilful 
management  implies  vigilant  oversight  and  prompt  command, 
but  also  because  men  catch  skill,  promptitude,  and  energy  by 
unconscious  imitation  from  their  chief,  and  further  feel  a certain 
stimulus  from  the  satisfaction  of  taking  part  in  effectively  or- 
ganised performance.  For  though,  under  present  circumstances, 
the  strongest  stimulus  to  the  energy  of  average  men — whether 
employed  or  employers — is  undoubtedly  supplied  by  the  desire 
of  gaining  wealth  for  themselves  or  their  families ; still  we  ought 
to  recognise,  as  actual  forces,  both  the  desire  of  turning  out  good 
work,  and  the  esprit  de  corps,  which  the  mere  fact  of  co-operating 
habitually  for  a given  end  tends  to  produce  in  average  human 
beings,  if  the  tendency  is  not  overpowered  by  the  consciousness 
of  conflicting  interests. 

The  foregoing  analysis  has  led  us  more  than  once  to  con- 
sider differences  in  the  moral  qualities  of  labourers,  as  causes 
of  variations  in  production.  The  economic  importance  of  these 
may  be  briefly  summed  up  thus : so  far  as  it  is  made  each 
labourer’s  interest  to  work  his  utmost,  the  more  prudence  and 
self-control  he  has,  the  more  he  will  increase  the  wealth  of  the 
community;  while  again,  the  more  he  is  actuated  by  sense  of 
duty  and  wide  public  spirit,  the  more  productive  his  labour  will 
be  under  circumstances  in  which  the  coincidence  between  his 
own  interest  and  that  of  society  is  wanting  or  obscure.  The 
dishonest  workman  who  scamps  piece-work  and  is  slothful  if 
paid  by  the  day,  the  dishonest  manufacturer  who  employs 
labour  and  capital  in  producing  the  illusory  semblance  of 
utility,  the  tradesman  who  spoils  his  wares  by  adulterating 
them,  all  diminish  produce.  But  besides  self-interest  on  the 
one  hand,  and  the  influence  exercised  by  common  morality 
and  regard  for  the  general  good  on  the  other,  we  have  to 
take  special  note  of  the  narrower  esprit  de  corps  fostered  by 
combinations  of  persons  with  similar  interests ; especially  in 
modem  societies  among  the  labourers  in  particular  industries 
by  such  organisations  as  trades-unions.  So  far  as  the  rules  of 


112 


POLITICAL  ECONOMY 


BOOK  I 


such  associations,  and  the  general  opinion  and  sentiment  which 
they  produce  or  intensify,  are  directed  towards  the  maintenance 
of  a high  standard  of  workmanship,  their  effect  on  production 
is  likely  to  be  beneficial.  In  some  cases,  however,  the  rules  and 
practices  of  trades-unions  have  acted  in  an  opposite  direction, 
by  resisting  measures  designed  to  economise  labour  ; it  being 
considered  to  be  the  interest  of  labourers  in  any  particular 
industry  that  the  field  of  employment  should  be  as  large  as 
possible.  How  far  this  view  is  sound  we  do  not  now  consider ; 
here  we  have  merely  to  observe  that  the  prevalence  of  this 
belief  causes  this  narrower  esjirit  de  corps  to  diminish  the  pro- 
ductive efficiency  of  the  aggregate  labour  of  the  community^ 

§ 6.  In  examining  variations  in  the  personal  efficiency  of 
individual  labourers,  we  have  been  led  to  treat  of  the  indirect 
effects  of  co-operation  and  association  of  workers,  in  developing 
skill  and  energy  and  esprit  de  corps.  Let  us  now  pass  to  con- 
sider the  more  obvious  and  important  gains  in  productiveness 
of  labour,  due  directly  to  the  same  association  and  co-operation. 

We  may  notice,  first,  the  more  elementary  advantages  ob- 
tained by  co-operation  in  its  simplest  form.  There  are  many 
things  which  one  man  alone  cannot  do,  but  which  are  readily 
accomplished  by  the  simultaneous  action  of  several  men. 
The  raising  of  a given  weight,  for  example,  requires  a certain 
force,  which  may  be  obtained  when  the  power  of  two  men  is 
simultaneously  applied,  where  it  could  not  be  obtained  by  any 
amount  of  successive  effort  on  the  part  of  either  working  singly. 
But  further,  it  is  soon  found  that  frequently  little  or  no  more 
labour  is  required  to  render  a given  service  to  several  persons 
than  is  required  to  render  it  to  one.  “ The  fire  and  the  water 
“ and  the  care  requisite  to  prepare  the  food  of  one  man  'wdll 
“ equally  prepare  the  food  of  three  or  four.  Consequently, 
“ where  two  men  have  to  do  two  different  things,  if,  in  place 
“ of  each  performing  these  two  several  acts,  they  can  with  the 
“ same  or  nearly  the  same  effort  perform  for  their  joint  benefit 
“ each  one  act  sufficient  for  the  two,  there  is  a clear  saHng  of 
“ half  their  labour  Thus,  as  simple  co-operation  increases 
power.  Division  of  Employments,  or,  as  it  has  been  called  by 

1 The  loss  to  production  caused  by  conflicts  between  labourers  and  employers 
as  to  wages  will  be  noticed  later  in  this  chapter. 

2 Cf.  Hearn,  Plutology,  pp.  124,  208. 


CHAP.  IV  CAUSES  OF  VARIATIONS  IN  PRODUCTION 


113 


economists  since  Adam  Smith,  Division  of  Labour,  economises 
its  use;  and  in  this  way  division  of  employments  would  in 
many  cases  cause  a most  important  gain,  independently  of 
any  consequent  increase  of  aptitude  in  the  labourers  whose 
functions  are  thus  specialised.  Postal  communication  affords  a 
striking  example  of  this.  There  is  not  much  room  for  increase 
of  dexterity  in  the  simple  process  of  delivering  a letter;  the 
economic  advantage  of  making  letter-carrying  a separate  em- 
ployment depends  almost  entirely  on  the  great  diminution  of 
labour  that  each  separate  delivery  requires,  when  one  man 
delivers  all  the  letters  in  the  same  street.  In  many  cases, 
again,  there  is  a great  advantage  in  saving  the  time  lost  in 
passing  from  one  set  of  actions  to  another ; especially  when  the 
subdivision  of  employments  is  carried — as  it  is  in  many  modem 
manufactures — so  far  that  each  worker  has  only  to  perform 
one  very  short  series  of  actions,  repeated  as  often  as  possible. 
Still  by  far  the  most  striking  advantage  of  the  division  of 
employments  is  the  increased  dexterity  of  the  workmen ; the 
vastly  greater  ease,  rapidity,  and  accuracy  which  constant 
repetition  gives  to  the  performance  of  any  act  or  set  of  acts. 
Probably  no  paragraph  in  Adam  Smith’s  works  is  so  widely 
known  as  that  in  which  he  contrasts  the  number  of  pins  that 
a man  could  make  by  himself  with  the  number  that  he  can 
make  when,  in  combination  with  others,  he  confines  himself  to 
a single  part  of  the  process ; and  certainly  the  degree  of 
additional  efficiency  that  a worker  can  acquire,  in  work  of 
a tolerably  simple  and  uniform  kind,  under  a highly  developed 
system  of  divided  employment,  is  greater  than  anyone  without 
specific  experience  would  have  imagined.  There  is  a further 
economic  advantage  in  the  fact  that  the  training  required  to 
bring  each  labourer  up  to  full  efficiency  tends  to  become  shorter 
and  less  expensive,  as  the  work  he  has  to  do  becomes  limited 
and  simplifiedh  A more  important  gain  than  this  last  consists 
in  the  economy  of  aptitudes  that  becomes  possible,  through  the 

' To  some  extent  this  advantage  is  purchased  by  a corresponding  risk  of  the 
labourer’s  being  reduced  to  inefficiency,  in  case  of  his  employment  failing ; but 
it  may  be  observed  that  separation  of  employments  in  any  particular  industry 
does  not  always  involve  a corresponding  specialisation  of  labour:  as  the 
particular  tasks  allotted  to  a given  class  of  labourers  in  one  branch  of 
industry  may  have  counterparts  more  or  less  closely  correspondent  in  other 
branches. 


S.  P.  E. 


8 


114 


POLITICAL  ECONOMY 


BOOK  I 


continually  increasing  variety  of  emplopnents ; there  is  thus 
greater  opportunity  of  setting  different  individuals  to  do  what 
they  can  do  best,  and  all  exceptional  gifts  and  talents  become 
indefinitely  more  profitable  to  society  when  their  possessor  can 
be  set  free  from  all  work  except  that  for  which  he  is  specially 
gifted*.  We  may  notice  as  an  instance  of  this  that  the  chief 
part  of  the  knowledge,  foresight,  and  power  of  complicated 
calculation,  that  are  indispensable  to  the  successful  conduct  of 
many  industries,  need  only  be  possessed  by  the  comparativelv 
small  number  of  persons  required  for  the  function  of  manage- 
ment. Finally,  the  division  of  employments  enables  mankind 
to  utilise  to  the  utmost  not  only  the  special  qualities  of  human 
beings,  but  similarly  the  superior  natural  provision  of  the 
materials  or  instruments  of  production  in  different  countries 
and  districts.  Through  this  division  each  article  consumed 
by  any  one  may  be  produced  in  the  place  where  the  labour 
of  producing  it  is  most  effective,  due  allowance  being  made  for 
the  labour  and  time  lost  in  canydng  it  to  the  consumer;  and 
also  for  certain  other  disadvantages  and  risks  which  I shall 
presently  notice. 

The  division  of  employments  has  different  economic  effects 
according  as  the  co-operating  workers  are  organised  under  one 
management,  or  under  several  different  managements.  So  far 
as  the  simultaneous,  or  nearly  simultaneous,  combination  of 
a number  of  different  acts  is  required  for  the  accomplishment 
of  a single  result,  it  is  necessary  that  the  labourers  should  be 
in  one  place,  and  generally  expedient  that  their  work  should  be 
under  the  direction  of  one  mind.  And  even  when  the  opera- 
tions to  be  performed  on  the  same  material,  before  it  becomes 
a finished  product,  are  merely  successive,  there  may  still  be 
a considerable  economic  advantage  in  uniting  the  labourers 
under  one  management,  and,  so  far  as  is  possible,  either  in  one 
building  or  buildings  nearly  adjacent.  For,  in  the  first  place, 
the  most  difficult  and  valuable  kind  of  labour,  that  of  manage- 
ment, is  thus  both  economised  and  made  more  efficient  in 
important  respects ; e.g.,  it  is  easier  to  adapt  the  product  to  the 
changing  needs  and  tastes  of  society  when  all  the  required 

1 Economists,  however,  have  rightly  drawn  attention  to  the  danger  that 
threatens  the  mental  development  of  the  labourer  through  an  excessive  sameness 
in  his  work. 


CHAP.  IV  CAUSES  OF  VARIATIONS  IN  PRODUCTION 


115 


changes  in  production  can  be  carried  out  under  one  direction ; 
again,  a more  exact  adjustment  is  possible  of  the  supply  of 
each  kind  of  labour  required,  so  that  every  class  of  producers 
can  be  kept  in  full  work ; and  further,  there  is  less  loss  of 
labour  and  time  in  carrying  the  product  in  different  stages 
from  one  set  of  producers  to  another,  and  taking  care  of  it 
till  it  is  wanted. 

For  similar  j'easons,  an  economy  of  labour,  especially  the 
labour  of  management,  as  well  as  of  the  utility  of  buildings 
and  other  instruments,  tends  to  be  realised,  generally  speaking, 
by  any  considerable  (if  well  adjusted)  increase  in  the  scale 
on  which  a business  is  organised.  A large  business,  too,  can 
afford  various  kinds  of  expenditure  on  the  whole  profitable, 
which  are  too  costly  or  too  uncertain  for  smaller  concerns : 
such  as  the  employment  of  elaborate  machinery,  or  highly 
skilled  and  specialised  labour,  outlay  for  experiments,  for  ob- 
taining information^,  &c.  The  extent  of  these  advantages, 
however,  varies  greatly  with  the  nature  of  the  industry ; and 
in  estimating  it  with  a view  to  practical  conclusions,  we  have 
to  compare  it  with  the  drawbacks  that  attend  industry  on  a 
large  scale,  especially  if  the  terms  of  co-operation  are  adjusted 
in  the  manner  that  is  at  present  most  common. 

§ 7.  We  have  already  noticed  that  the  conditions  on  which 
labourers  working  under  one  management  agree  to  co-operate 
may  differ  materially;  and  the  effects  of  these  differences,  not 
on  distribution,  but  on  efficiency,  and  therefore  on  produce, 
may  here  be  considered.  In  England  at  the  present  time  the 
greater  part  of  the  labour  purchased  by  employers  is  sold  for 
a price  simply  proportioned  to  its  time;  so  that  the  labourer 
has  not  nearly  so  strong  a motive  for  exerting  energy,  skill,  and 
care  as  he  would  have  if  he  were  working  on  his  own  account. 
The  consequent  diminution  in  the  productiveness  of  his  labour 
can  be  but  partially  prevented  by  watchful  supervision ; and  of 
course,  where  overseers  have  to  be  hired,  supervision  is  similarly 
liable  to  be  less  efficient.  When  payment  is  made  by  the 
“job”  or  “piece”  this  detriment  is  obviated,  so  far  as  mere 
quantity  of  work  is  concerned : and  it  tends  to  be  at  least  much 

' I do  not  mention  the  advantage  that  a large  business  has  in  gaining 
connexion  and  custom;  as  it  is  more  a private  gain  in  Distribution  than  a 
social  gain  in  Production. 


8—2 


116 


POLITICAL  ECONOMY 


BOOK  I 


reduced  if,  besides  a fixed  minimum  payment  for  time,  the 
worker  receives  an  addition  proportioned  to  his  efficiency  or 
economy,  as  tested  by  certain  definite  results, — as  when  a 
shopman  is  partly  remunerated  by  a payment  proportioned  to 
the  amount  of  his  sales,  or  as  when  a railway  company  en- 
courages thrift  in  fuel  and  grease  by  adding  to  the  wages  of  its 
employees  a certain  proportion  of  the  expenditure  saved  by 
them.  But  in  many  kinds  of  work  it  is  difficult  to  devise  a 
satisfactory  test  for  ascertaining  the  amount  gained  by  the 
extra  energy  and  thrift  of  the  workers : and,  in  particular, 
“ piece-wages  ” ^ are  often  found  impracticable  or  inconvenient 
from  the  difficulty  of  dividing  the  work  to  be  done  into 
sufficiently  independent  parts.  Moreover  this  mode  of  pay- 
ment, though  an  adequate  stimulus  to  quantity  of  work,  is 
liable  to  render  its  quality  inferior  through  careless  haste — or 
even  deliberate  “ scamping  ” — unless  the  worker  s task  can  be 
quite  definitely  marked  out  and  its  quality  easily  tested  and 
estimated^  Hence  in  the  industries  whose  produce  tends  to  be 
largely,  yet  somewhat  indefinitely,  increased  or  preserved  by 
minute  and  vigilant  attention  to  details,  together  with  oc- 
casional intensity  of  effort  to  meet  emergencies,  the  keen  in- 
terest which  one  who  works  on  his  own  account  feels  in  the 
result  is  a peculiarly  important  spring  of  effective  labour;  and 
an  organisation  of  industry  which  tends  to  multiply  this  force 
is  proportionally  advantageous.  In  such  industries,  therefore,  it 
may  be  economically  best — even  at  a partial  sacrifice  of  the 
advantages  of  division  of  labour — to  maintain  separate  busi- 
nesses on  a scale  so  small  as  to  enable  the  employer’s  super- 
vision to  be  everywhere  effective,  or  even  to  render  oversight 
almost  unnecessary,  the  chief  labour  being  that  of  the  employer 
himself  and  his  family ; especially  if  the  industry  be  one  in 
which  expensive  machinery  either  is  not  profitable  or  is  only 
occasionally  needed  and  may  be  conveniently  hired.  This  latter 
seems  to  be  at  present  the  case  in  certain  kinds  of  agriculture ; 
and  it  is  with  regard  to  these  that  the  advantage  of  production 

1 I have  adopted  from  Mr  Lalor,  the  translator  of  Koscher's  Political 
Econonii/,  this  translation  of  the  German  “Stiicklohn,”  as  a convenient  abbrevi- 
ation of  “wages  paid  for  piece-work.” 

- It  is  also  to  be  observed  that  the  method  of  piece-work  has  no  tendency  to 
prevent  unthrifty  use  of  the  employer’s  instruments  and  auxiliary  materials, 
so  far  as  these  have  to  be  entrusted  to  the  labourers. 


CHAP.  IV  CAUSES  OF  VARIATIONS  IN  PRODUCTION 


117 


on  a small  scale  has  been  chiefly  urged  h The  probability  of 
superior  management  on  the  part  of  the  small  employer  is  of 
course  diminished  in  proportion  as  he  has  to  share  with  any  one 
else  the  increment  of  produce  obtainable  thereby.  This  diminu- 
tion is  most  simply  and  completely  prevented  when  the  culti- 
vator is  also  the  owner  of  the  land  he  cultivates ; where  this  is 
not  the  case,  a nearly  equivalent  result  might  be  attained  by 
suitable  contracts  between  the  owner  and  the  cultivator-;  but 
such  contracts  have  frequently  been  wanting. 

Where  organisation  on  a large  scale  is  clearly  most  eco- 
nomical, it  would  seem  to  be  generally  the  interest  both  of 
the  employer  and  of  the  community  to  find  some  plan  of  re- 
munerating labour  which  may  supply  stronger  motives  to  energy 
and  thrift  than  mere  time-wages  can  furnish.  This  may  be 
done  either  by  piece-work  given  out  to  individuals — which  is 
extensively  used  in  many  industries*;  or  by  contracting  for 
piece-work  in  larger  lots  with  groups  or  “ gangs  ” of  labourers 
— a method  sometimes  available  where  ordinary  piece-work  is 
impracticable ; or,  again,  by  some  plan  of  adding  to  time-wages 
a premium  or  bonus  allotted  to  labourers  who  have  shewn 
efficiency  or  economy  above  a certain  standard.  But,  as  was 
before  said,  none  of  these  methods  is  univemally  applicable ; 
nor  can  they  be  relied  on  to  prevent  a further  risk  of  detri- 
ment to  the  aggregate  production  of  the  community,  which 
the  customary  mode  of  dividing  the  earnings  of  industry  be- 


1 Cf.  Mill,  Book  I.  c.  IX.,  where  the  kinds  of  culture  mentioned  include 
“ not  only  the  vine  and  the  olive,  where  a considerable  amount  of  care  and 
“ labour  must  be  bestowed  on  each  individual  plant,  but  also  roots,  leguminous 
“ plants,  and  those  which  furnish  the  materials  of  manufactures.” 

2 Some  writers,  who  have  followed  Mill  in  advocating  Peasant  Proprietor- 
ship, seem  to  regard  it  as  something  more  than  a means  of  securing  to  the 
cultivator  all  the  fruits  of  his  labour  and  of  enabling  him  to  employ  his  labour 
in  the  most  productive  way  possible ; they  speak  as  if  the  mere  sense  of  owner- 
ship of  the  land  on  which  a man  labours  supplied  a peculiar  stimulus  to 
energetic  labour.  Without  denying  the  existence  of  this  sentiment,  I may 
point  out  that  it  can  hardly  be  included  in  the  “ desire  of  wealth,”  which  Mill 
and  other  economists  treat  as  summing  up  all  the  springs  of  labour  attributed 
to  men  in  economic  reasonings ; and  the  motive  is  of  too  refined  a kind  to 
justify  us,  without  more  evidence  than  has  yet  been  given,  in  assigning  to  it  an 
important  place  among  the  springs  of  action  of  average  men. 

* Thus  “in  the  tailoring  trades,  in  shoemaking,  and  in  most  of  the  other 
“ industries  engaged  in  the  manufacture  of  articles  for  personal  wear,  payment 
“ by  the  piece  is  nearly  universal.”  Howell,  Capital  and  Labour,  c.  vi. 


118 


POLITICAL  ECONOMY 


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tween  laboiirers  and  employers  involves, — the  danger,  namely, 
of  obstinate  disagreement  as  to  the  price  to  be  given  for  the 
labourers’  services,  resulting  in  more  or  less  extensive  and 
prolonged  stoppages  of  work.  Such  stoppages  natm'ally  tend 
to  be  more  frequent  and  more  prolonged  in  the  present  stage 
of  our  industrial  development,  in  which  combinations  of  la- 
bourers tend  to  be  vigorous  and  active;  and,  whether  im- 
mediately due  to  “ strikes  ” of  labourers,  or  to  retaliatory 
“ lock-outs  ” of  masters,  they  inevitably  cause  much  loss  of 
wealth  to  the  community. 

With  a view  of  avoiding  the  evils  of  these  obstinate  dis- 
agreements— and  also  of  securing  adequate  stimulus  to  exertion 
and  thrift — the  plan  of  giving  the  labourer  a share  in  the 
profits  of  the  business  in  which  he  is  employed  has  been,  in 
recent  times,  strongly  recommended  both  by  theorists  and  by 
practical  men ; and  many  experiments  have  been,  and  are 
being,  made  in  this  direction,  some  of  which  have  had  a 
striking  amount  of  success.  So  far,  however,  as  this  method 
of  Participation  of  Profits  appeals  to  the  ordinary  economic 
motive  of  private  interest,  it  can  hardly  be  as  directly  effective 
as  the  method  of  piece-work,  or  even  as  adequate  as  properly 
graded  premiums  for  extra  exertion  and  thrift ; since  the  labourer 
who  is  paid  by  the  piece,  or  by  an  adequate  premium  or  bonus, 
depends  entirely  on  his  own  energy  and  care  for  the  addition  to 
his  wages,  whereas  when  the  workmen  share  profits  each  indi\d- 
dual’s  gain  is  mainly  determined  by  the  efficiency  and  economy 
of  others.  And  this  objection  becomes  stronger,  the  more  the 
profit  of  the  business  depends  on  the  energy-  and  skill  of  the 
management;  since,  so  far  as  this  is  the  case,  what  the  workmen 
who  participate  in  profits  divide  may  really  have  been  in  the 
main  produced  by  the  manager’s  labour*.  On  the  other  hand, 
in  industries  in  which  overseeing  by  the  employer  or  his  agent 
is  difficult  and  liable  to  be  ineffective,  the  mutual  super^dsion 
of  the  workmen,  stimulated  by  the  interest  that  all  have  in  the 
results  of  each  other’s  labour,  is  a valuable  advantage : especially 
if  piece-work  is  inapplicable.  And  further,  it  is  to  be  noted  that 
the  chief  advocates  of  profit-sharing  do  not  merely  regard  it  as 

* It  may  be  observed,  however,  that  in  such  cases  there  is  a strong  reason  for 
giving  the  manager — and  any  leading  subordinates  who  share  his  important 
work — -a  specially  important  share  in  profits. 


CHAP.  IV  CAUSES  OF  VARIATIONS  IN  PRODUCTION 


119 


appealing  to  the  workman’s  private  interest : rather,  in  their  view, 
one  of  its  chief  advantages  lies  in  the  habit  of  working  for  the 
common  interest — with  a sense  that  private  interest  is  therewith 
bound  up — which  the  system  tends  to  develop.  It  is  largely 
through  this  moral  effect  that  it  is  held  to  be  preventive  of  ob- 
stinate disagreement  about  wages.  It  seems  probable,  however, 
that  the  realisation  of  this  last  advantage  depends  largely  on 
the  employer’s  possession  of  personal  qualities  that  win  the 
confidence  of  those  whom  he  employs : for  a new  danger  of 
conflict  is  introduced  by  the  necessity  of  agreeing  upon  a scale 
of  participation.  Even  where  such  confidence  is  established,  the 
participation  of  all  employees  in  profits  must  tend  to  divulge 
the  financial  condition  of  a business ; and  this  loss  of  secrecy 
may  be  a material  disadvantage  in  competition  with  other 
businesses,  either  by  inviting  rivalry  when  times  are  good 
or  by  impairing  the  employer’s  credit  in  times  of  pressure. 
Hence  the  plan  seems  more  suitable  for  adoption  in  the  case 
of  management  by  joint-stock  companies — where  the  advan- 
tages of  secrecy  have  already  been  given  up — than  by  private 
employers,  unless  as  philanthropists.  Again,  the  method  seems 
not  easily  applicable  to  work  of  which  the  profit  is  remote,  for 
example,  to  large  building  works  that  may  last  some  years,  since 
the  motive  supplied  by  the  prospect  of  a share  is  in  such  cases 
too  weak  to  give  the  requirdd  stimulus  to  the  minds  of  average 
workmen;  nor  is  it  applicable  where  the  profit  is  difficult  to 
estimate  precisely ; nor  perhaps  where  it  is  veiy  fluctuating,  and 
liable  to  alternate  with  heavy  loss',  which  the  workmen  cannot 
be  expected  to  share. 

Still,  with  all  deductions  and  limitations,  the  amount  of 
success  attained  by  the  system  of  profit-sharing  in  certain  cases 
remains  a striking  and  noteworthy  fact,  and — though  it  is  per- 
haps doubtful  how  far  we  can  argue  from  success  in  a few  cases, 
in  which  the  stimulus  of  unfiimiliar  gain  is  likely  to  have  been 
exceptionally  effective — there  is  certainly  ground  foi'  hopeful 
further  experiments,  especially  in  businesses  whose  conditions 
are  peculiarly  adapted  for  it.  Such — as  we  have  seen — are  busi- 
nesses which  are  making  an  easily  estimated  and  comparatively 

' This  difficulty  may  perhaps  be  satisfactorily  met  by  the  establishment  of 
a reserve  fund ; and  by  making  workmen’s  siiares  take  partly  the  form  of 
savings,  of  which  they  will  reap  the  benefit  in  times  of  adversity. 


120 


POLITICAL  ECONOMY 


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steady  quantum  of  profit,  where  management  is  comparatively 
easy  and  straightforward,  where  much  may  be  gained  by  the 
industry  and  thrift  which  an  average  man  can  be  induced  to 
exercise  by  the  prospect  of  a moderate  addition  to  his  income, 
and  where  the  mutual  watchfulness  of  workmen  is  likely  to  be 
decidedly  more  effective  than  supervision  from  above. 

So  far  I have  been  chiefly  considering  the  principle  of  profit- 
sharing  as  applied  in  what  is  called  “ Industrial  Partnership  ” ; 
that  is,  I have  here  supposed  that  the  capital  employed  in  the 
business  is  mainly  or  entirely  owned  by  a few  persons,  who 
retain  the  whole  management  of  the  concern  in  their  hands, 
and  are  in  fact  merely  capitalist  employers  who  have  agreed  to 
give  their  employees  a share  of  their  profits.  Another  application 
of  the  same  principle,  differing  importantly  from  that  which  we 
have  bpen  discussing,  is  exhibited  by  what  is  often  called  in 
a special  sense  Co-operative  Production’ ; in  which  the  capital 
employed  in  the  business  is  owned  (or  borrowed)  by  the  labourers 
employed  in  it,  who  accordingly  form  a joint-stock  company  with 
a salaried  manager,  and  divide  among  themselves  whatever  profit 
they  make,  after  paying  wages  at  the  market-rate  and  what  is 
regarded  as  fair  interest  on  capital.  Here  the  stimulus  exercised 
on  the  co-operators  by  the  prospect  of  profits  is  at  its  maximum  ; 
but  this  advantage  seems  inevitably  counterbalanced  by  a cor- 
responding diminution  in  the  manager’s  motive  to  activity — so 
far  as  he  is  actuated  by  self-interest— in  comparison  with  the 
motives  that  act'  on  an  ordinary  capitalist  employer.  There  are 
the  further  dangers,  (1)  that  a body  of  shareholders  receiving 
little  more  than  the  ordinary  wages  of  manual  labourers  may  be 
inclined  to  the  mistaken  economy  of  paying  their  manager  in- 
adequately, and  so  buying  inferior  management  at  a price  dear 
though  low ; and  (2)  that  labourers,  having  the  ultimate  control 
of  the  business  in  which  they  labour,  may  not  leave  their  manager 
sufficient  freedom  of  deciding  large  matters  that  cannot  wait, 
and  may  not  render  him  sufficiently  prompt  obedience  in  the 
ordinary  course  of  the  work. 

’ It  should  be  observed  that  the  term  is  sometimes  used  to  include  businesses 
carried  on  in  connexion  with  the  artisans’  Co-operative  Stores,  and  accordingly 
managed  by  associations  of  consumers  who  do  not  share  profits  with  their 
employees  as  such.  This  system  may  be  economically  advantageous,  as  an 
extension  of  the  business  of  Co-operative  Stores : but  its  principle  is  altogether 
different  from  that  discussed  in  the  text. 


CHAP.  IV  CAUSES  OF  VARIATIONS  IN  PRODUCTION 


121 


It  is  to  be  observed  further  that  neither  of  these  forms  of 
profit-sharing — not  even  the  last-mentioned — affords  complete 
security  against  conflicts  among  the  co-operating  workers. 
Wages,  as  I said,  are  to  be  paid  at  the  market-rate ; but  it  is 
precisely  against  the  market-rate  that  strikes  take  place ; and 
the  labourers  of  any  particular  class  within  the  concern  may 
feel  their  community  of  interests  with  members  of  the  same 
class  outside,  more  strongly  than  they  feel  their  community 
of  interests  with  the  differently  paid  labourers — including  the 
manager — of  their  own  business';  especially  when  the  co-opera- 
tive business  is  not  sufficiently  flourishing  to  allow  them  a 
substantial  bonus  out  of  profits.  They  will  no  doubt  avoid 
one  source  of  conflict  between  labour  and  capital,  as  their 
knowledge  of  their  own  business  will  prevent  them  from  having 
exaggerated  views  of  the  profits  that  capitalist  employers  are  at 
any  time  obtaining ; and  it  has  been  justly  urged  that  in  this 
way  the  “ co-operators  ” (in  this  narrow  sense)  may  render  an 
important  service  to  other  labourers  and  employers.  It  does 
not  appear,  however,  that  the  plan  has  yet  been  applied  so 
extensively  and  successfully  as  to  enable  this  service  to  be 
largely  realised : and  indeed  the  whole  principle  of  participa- 
tion of  profits  is  as  yet  more  important  on  account  of  what 
is  hoped  from  it  in  the  future  by  thoughtful  and  instructed 
persons,  than  in  virtue  of  the  results  that  have  been  achieved 
by  it  up  to  the  present  time^ 

I now  pass  to  consider  the  other  mode  of  arranging  the 
division  of  employments ; according  to  which  labourers  or  groups 
of  labourers  work  independently  and  merely  co-operate  by  ex- 
changing their  products.  This  form  of  co-operation  occurs  as 


' Lord  Brassey  (Lectures  on  the  Labour  Question,  vi.  p.  131)  mentions  the 
occurrence  of  a strike  in  the  Ouseburn  Engine  Works,  which  he  calls  “ the 
“ most  important  experiment  in  co-operative  production  hitherto  attempted  in 
“ this  country.” 

2 I defer  for  the  present  the  discussion  of  other  expedients  for  settling  or 
preventing  disagreements  as  to  wages : — such  as  boards  of  conciliation,  arbitra- 
tion, and  automatic  “sliding  scales”  by  which  the  wages  in  certain  industries 
are  made  to  vary  with  the  prices  of  the  products  of  the  industries  according  to  a 
fixed  ratio.  Such  expedients  do  not  aim  at  improving  production  except  nega- 
tively by  the  prevention  of  conflict ; what  they  primarily  seek  to  attain  is  a 
satisfactory  division  of  the  proceeds  of  industry  between  employers  and  em- 
ployees : it,  therefore,  seems  more  appropriate  to  discuss  them  under  the  head  of 
Distribution.  See  Book  II.  c.  x.  § 5,  and  Book  HI.  c.  vii.  § 7. 


122 


POLITICAL  ECONOMY 


BOOK  I 


an  alternative,  in  certain  industries,  to  the  combination  under 
one  management  of  the  different  parts  of  a complex  process 
performed  on  the  same  material : but  it  wdll  be  evident  at  a 
glance  that  it  has  a far  wider  scope.  Indeed  we  may  say 
that  co-operation,  in  this  sense,  is  nothing  less  than  the  funda- 
mental principle  on  which  the  whole  industrial  organisation  of 
society  is  based.  It  is  lanifest  that  the  aggregation  of  the 
producers  of  particular  commodities  in  separate  large  establish- 
ments, of  which  we  have  been  speaking,  is  only  rendered  possible 
through  the  tacit  and  unconscious  consent  of  the  rest  of  society 
to  make,  use  of  their  services  by  purchasing  their  products. 
Without  exchange,  division  of  employment  could  not  be  con- 
veniently carried  very  far,  so  long  as  the  present  system  of 
private  ownership  was  maintained  unaltered : through  exchange 
it  might  easily  embrace  the  whole  inhabited  globe  in  one  vast 
scheme  of  co-operation : and  in  fact  its  development  only  tends 
to  stop  at  the  point  at  which  its  advantages  are  outweighed 
by  the  drawbacks  incident  to  production  for  distant  consumers. 
The  most  obvious  of  these  drawbacks  lies  in  the  additional 
labour  and  time  spent  in  conveyance  and  communication  be- 
tween producer  and  consumer ; but  we  have  also  to  take  into 
account  the  increased  difficulty  of  adjusting  supply  to  demand, 
owing  to  the  difficulty  that  the  producer  has  in  obtaining  full 
information  as  to  the  consumers’  needs ; which  entails  normally 
an  increased  expenditure  of  time  and  labour  in  keeping  finished 
products  in  warehouses  and  shops.  In  some  few  cases  an 
absolute  waste  of  such  products  has  resulted  from  a great  over- 
supply  of  a particular  ware,  the  demand  for  which  has  been 
miscalculated.  More  frequently  this  kind  of  miscalculation  has 
caused  wares  to  be  left  on  the  hands  of  producers  or  tradere  for 
an  inordinate  length  of  time ; has  rendered  expensive  machinery 
and  acquired  skill  temporarily  or  even  permanently  useless ; 
and  has  inflicted  on  the  industries  thus  disorganised,  and  others 
to  whom  the  effect  spreads  from  them,  the  more  indefinite  evils 
of  general  depression  of  energy  and  enterprise.  These  di-aw- 
backs  and  dangem,  however,  are  in  some  cases  at  least  not 
found  sufficient  to  neutralise  the  advantages  of  producing  even 
at  the  distance  of  a great  semicircle  of  the  earth’s  surface  from 
the  consumer. 

I 8.  The  wonderful  development  and  spontaneous  organisa- 


CHAP.  IV  CAUSES  OF  VARIATIONS  IN  PRODUCTION 


123 


tion  of  industries,  which  we  have  just  been  contemplating,  would 
not  have  taken  place  without  a corresponding  and  simultaneous 
development  in  two  other  fundamentally  important  aids  to  the 
efficiency  of  labour,  which  we  must  now  expressly  notice.  We 
may  take,  first,  the  one  of  which  we  have  already  had  occasion  to 
speak ; the  growth  of  man’s  knowledge  of  the  external  world, 
and  also  of  his  ingenuity  in  applying  that  knowledge,  which, 
when  combined,  constitute  what  we  call  the  “ progress  of  in- 
“ vention.”  So  long  as  invention  was  comparatively  undeveloped, 
the  extent  of  profitable  co-operation,  within  the  range  of  each 
particular  industry,  was  closely  limited : since  so  long  as  the 
processes  of  production  are  simple  and  rude,  the  economic  ad- 
vantages of  breaking  them  up  into  parts  are  comparatively 
soon  exhausted : it  is  not  till  invention  has  rendered  these 
processes  elaborate  and  complicated  that  the  brilliant  triumphs 
of  “ division  of  labour  ” can  be  won.  On  the  other  hand, 
as  co-operation  through  exchange  is  developed,  and  the  general 
demand  for  the  product  of  any  particular  industry  extended, 
the  field  of  the ' economic  application  of  inventions  is  corre- 
spondingly increased : it  may  not  be  possible  to  use  costly 
machinery,  however  ingeniously  adapted  to  its  work,  unless 
the  demand  for  its  products  is  sufficient  to  keep  it  in  con- 
stant employment.  Division  of  labour,  again,  supplies  more 
favourable  conditions  for  invention,  since,  when  the  labourer’s 
attention  is  concentrated  on  a few  acts,  he  is  more  likely  to 
discover  improvements  in  the  mode  of  performing  them*;  while 
at  the  same  time  his  increased  skill  renders  him  more  qualified 
to  profit  by  delicate  and  elaborate  inventions. 

In  considering  Invention  as  a source  of  increased  production, 
we  must  extend  the  meaning  of  the  term  to  include  all  ex- 
pedients for  saving  labour  or  augmenting  its  utility;  whether 
introduced  in  particular  departments  of  industries,  or  in  the 
great  social  organisation  of  industries  through  exchange ; and 
whether  introduced  with  full  deliberation  by  single  individuals, 
or  through  the  half  spontaneous  and  unconscious  concurrence 

* It  should  be  observed  that  the  most  striking  and  (so  to  say)  revolutionary 
improvements  in  industry  have  often  been  made  by  persons  of  inventive  genius 
not  employed  in  the  industry.  But  a number  of  smaller  improvements,  indivi- 
dually less  noticeable  but  important  in  the  aggregate,  are  continually  suggested 
by  workmen. 


124 


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BOOK  I 


of  many.  In  this  sense  the  transition,  in  an  early  stage  of 
social  development,  from  barter  to  money  may  be  spoken  of 
as  an  invention  of  the  greatest  importance;  and  similarly  any 
later  improvements  in  the  machinery  of  exchange,  such  as  the 
substitution  of  a good  paper  currency  for  gold  and  the  develop- 
ment of  a good  system  of  banking,  or  even  the  adoption  of  the 
decimal  system  of  measurement.  So  again,  we  might  regard 
the  system  of  Profit-sharing — if  it  should  ever  realise  the  hopes 
of  its  most  sanguine  promoters— as  an  invention  of  first-class 
social  utility ; and  we  may  even  now  so  regard  the  remarkable 
economy  of  labour  in  the  retail  trade  effected  by  the  artisans’ 
Co-operative  Stores  in  Great  Britain;  which,  chiefly  by  an  effective 
combination  of  the  advantages  of  ready  money  payments  with  the 
advantages — gradually  gained — of  organisation  of  business  on  a 
large  scale,  have  in  little  more  than  50  years  accumulated  some 
£20,000,000  of  capital  owned  by  over  1,700,000  members.  It 
should  be  observed,  too,  that  many  of  the  most  useful  improve- 
ments in  production  at  a particular  time  and  place  are  obtained 
by  tbe  application  of  inventions  already  known,  but  hitherto 
neglected  from  ignorance,  inertness,  or  some  other  cause.  The 
economic  history  of  all  countries  affords  abundant  instances  of 
this  ; in  recent  times  the  introduction  or  development  of  systems 
of  canals  and  railways  in  different  countries  are  particularly 
impressive  examples. 

There  are  important  economic  differences  between  different 
kinds  of  invention.  In  the  first  place,  what  is  invented  may  be 
either  a new  instrument  or  merely  a new  process.  In  some 
cases  a great  improvement  in  the  result  attained  by  a given 
expenditure  of  labour  may  be  effected  by  a new  application 
of  natural  forces  to  produce  a desired  result,  without  the  inter- 
vention of  any  new  tools.  The  application  of  the  sun  and 
air  in  bleaching,  and  of  fire  in  clearing  land  for  cilltivation, 
exemplify  this  first  kind  of  invention.  But  it  mostly  happens 
that  the  new  process  discovered  requires  also  new  instruments 
or  auxiliary  materials  which  are  themselves  products  of  labour. 
In  this  latter  case  it  is  important  to  notice  that  the  use  of 
a more  efficient  instrument  would  not.  always  involve  a gain 
in  the  efficiency  of  labour  on  the  whole : since  the  better  in- 
strument might  require  more  labour  to  make  and  keep  in 
repair,  and  it  is  possible  that  this  extra  labour  might  be 


CHAP.  IV  CAUSES  OF  VARIATIONS  IN  PRODUCTION 


125 


more  productive  if  applied  in  some  other  way.  Thus  an  in- 
vention technically  successful  may  fail  economically. 

But  further,  even  when  invention  has  shewn  the  way  to 
a manifest  increase  in  the  productiveness  of  labour  by  the 
adoption  of  a new  process,  it  may  still  be  impossible  or  in- 
expedient for  the  labourers  to  adopt  it.  For  the  new  process 
may  involve  the  use  of  costly  instruments  or  an  increased  delay 
in  producing  the  desired  result;  and  the  labourers — or  those 
who  purchase  their  labour — may  be  unable  to  buy  the  instru- 
ments or  unwilling  to  submit  to  the  delay.  Or  again,  the  new 
instruments  may  require  other  instruments  or  materials  to 
make  them  at  all,  or  to  make  them  economically;  and  the 
workers  may  not  be  able  to  procure  these.  In  either  case 
we  should  ordinarily  describe  the  obstacle  by  saying  that  the 
invention  was  not  carried  into  effect  for  want  of  Capital.  We 
are  thus  led  to  what  economists  have  commonly  held  to  be  the 
most  important  source  of  increase  in  the  efficiency  of  labour; 
namely,  the  accumulation  of  capital.  Unfortunately,  this  car- 
dinal term  is  used  variously  and  often  ambiguously  by  different 
writers;  and,  as  we  shall  see,  it  has  to  be  used  differently 
for  the  purposes  of  different  economic  inquiries.  Hence  it 
seems  desirable,  before  we  proceed  further,  to  obtain  a clear 
view  of  the  different  conceptions  which  the  term  represents, 
and  of  their  mutual  relations. 


CHAPTER  V. 


CAPITAL. 

§ 1.  The  terms  Value  and  Wealth,  which  we  have  in 
previous  chapters  attempted  to  define,  are  in  the  fullest  sense 
comvion  terms : that  is,  they  enter  habitually  into  the  ordinal^' 
thought  and  speech  of  all  civilised  men.  “ Capital  ” on  the 
other  hand  is,  when  the  scientific  economist  first  begins  to  deal 
with  it,  already  a semi-technical  term ; being  habitually  used 
not  by  men  generally  in  their  ordinary"  thought,  but  by  men  of 
business  and  others  when  discussing  industrial  matters.  The 
meaning,  however,  that  it  has  thus  acquired  is  not  that  which 
is  adapted  to  the  needs  of  the  present  investigation.  For  the 
man  of  business  means  by  “ Capital  ” wealth  employed  so  as  to 
bring  its  possessor  a suiplus,  which  we  may  call  in  a wide  sense 
“profit”*;  but  it  is  obvious  that  wealth  may  yield  a surplus  to 
the  individual  owning  it,  even  when,  from  the  point  of  view  of  the 
community,  it  is  wasted  without  return — as,  for  example,  the 
money  that  a usurer  lends  to  a spendthrift.  Such  money  is  pro- 
perly regarded  as  a portion  of  the  aggregate  capital  of  individual 
members  of  the  community,  when — in  the  Theor}'  of  Distribu- 
tion— we  consider  the  return  to  capital  as  determined  by  supply 
and  demand^ ; but  it  is  clearly  not  a part  of  the  “ social  ” capital 
with  which  we  are  concerned  in  the  Theory  of  Production. 

We  have,  therefore,  to  modify  considerably  the  current 
notion  of  Capital  in  adapting  it  for  use  in  the  Theor}'  of 
Production : and  the  difficulties  which  arise  in  regard  to  the 

* It  is  convenient  here  to  use  the  term  “profit”  in  a vide  sense,  so  as  to 
include  the  “ interest  ” on  money  lent,  as  one  species  of  profit.  See  next  chapter, 
page  162. 

Cf.  c.  VI.  § 3 of  the  following  Book. 


CHAP.  V 


CAPITAL 


127 


definition  of  capital — so  far  as  they  are  not  caused  by  an 
erroneous  analysis  of  economic  facts — are  due  to  the  different 
ways  in  which  it  is  possible  to  modify  the  current  notion,  and 
the  fact  that  the  differences  have  not  always  been  brought  into 
clear  view. 

To  avoid  these  difficulties  as  far  as  possible,  let  us  begin  by 
asking  what  exactly  is  meant  from  the  point  of  view  of  the 
individual  capitalist,  by  “ wealth  employed  to  bring  a profit.” 
It  does  not  mean  that  the  wealth  is  necessarily  in  the  form  of 
instruments  or  materials  for  making  new  wealth,  or  in  the  form 
of  food,  clothing,  &c.,  for  the  labourers  who  are  using  the  instru- 
ments : for  it  makes  no  difference  to  the  individual’s  income 
whether  his  wealth  is  used  productively  or  unproductively,  so 
long  as  he  gets  his  profit.  What  is  meant  is  that  the  individual 
is  using  his  wealth — either  personally,  or  by  lending  it  to  others 
— in  such  a way  that  he  continually  finds  himself  possessed  of 
the  equivalent  of  what  was  originally  devoted  to  such  use,  to- 
gether with  some  additional  wealth ; this  additional  wealth 
being  what  is  called  profit.  Or,  more  precisely,  we  should  say 
that  the  hope  of  finding  himself  possessed  of  this  profit  is  his 
motive  for  thus  using  his  wealth ; since  we  should  agree 
that  capital  does  not  lose  its  essential  characteristics  by 
becoming  actually  profitless.  We  have,  therefore,  first  to 
ascertain  what  portion  of  a man’s  wealth  is  being  employed 
with  the  aim  of  making  its  o%vner  continually  richer;  and 
then  to  distinguish  the  capital  from  the  profit.  In  the  case 
of  wealth  that  has  been  lent  to  some  one  else,  there  is  of 
course  no  difficulty;  as  the  sum  which  the  debtor  pays  for 
the  use  of  the  wealth  is  clearly  profit,  and  the  sum  which 
he  is  bound  to  replace  clearly  capital.  And  the  line  drawn 
in  this  case  can  be  ideally  extended  to  include  the  case  where 
the  wealth  has  been  spent  in  purchasing  a perpetual  annuity ; 
for  though  here  there  is  no  one  under  legal  obligation  to 
pay  at  any  fixed  time  an  equivalent  for  the  principal'  still 
actually  the  annuity  can  be  at  any  time  sold  at  its  market 
value,  so  that  we  may  regard  this  possible  price  as  the  capital. 
In  this  case,  however,  the  price  at  any  time  may  be  less  or 
more  than  the  sum  originally  spent;  and,  therefore,  in  calcu- 
lating profit  we  have  to  subtract  from  or  add  to  the  sums 
annually  received  a sum  sufficient  to  compensate  for  the 


128 


POLITICAL  ECONOMY 


BOOK  I 


difference.  A rather  more  difficult  question  arises  when  we 
consider  the  wealth  of  a man  employed  in  business.  A good 
deal  of  it  is,  of  course,  clearly  capital.  “ A manufacturer,  for 
“ example,  has  one  part  of  his  capital  in  the  form  of  buildings, 
“ fitted  and  destined  for  carrying  on  his  branch  of  manufacture. 
“ Another  part  he  has  in  the  form  of  machinery.  A third 
“ consists,  if  he  be  a spinner,  of  raw  cotton,  flax,  or  wool ; if 
“ a weaver,  of  flaxen,  woollen,  silk,  or  cotton  thread ; and  the  like, 
“according  to  the  nature  of  the  manufacture”*.  But  it  is  not 
quite  so  clear  how  we  are  to  regard  the  money  that  he  keeps 
uninvested,  or  the  finished  goods  that  he  has  in  his  warehouses ; 
for  though  he  will  partly  employ  the  former,  and  the  proceeds 
of  the  latter,  in  paying  his  workpeople,  replenishing  his  stock  of 
materials,  repairing  or  replacing  his  buildings  or  machinery,  he 
may  also  employ  part  in  supplying  luxuries  to  himself  and  his 
family^.  As  regards  the  money  that  the  capitalist  keeps  unin- 
vested, the  solution  seems  to  be  that  whatever  part  of  it  is  held 
to  be  required  for  current  use  in  his  business,  should  be  regarded 
as  capital.  It  may  not  be  always  possible  to  determine  with 
certainty  how  much  this  is;  the  capitalist  may  not  know  exactly 
what  money  he  keeps  for  business  purposes  and  what  for  private 
consumption;  and  if  he  does  not  know,  it  is  not  easy  for  any 
one  else  to  decide.  But  for  purposes  of  general  reasoning  we 
may  ignore  this  slight  margin  of  uncertainty  and  suppose  the 
line  between  the  two  portions  clearly  dra^vn — as  it  would  be  by 
a careful  man  of  business — and  regard  the  money  that  is  kept 
for  current  use  in  business  as  a part  of  the  owner’s  capital. 
His  stock  of  finished  goods,  again,  so  long  as  it  remains  unsold, 
is  capital ; but  capital,  if  I may  so  say,  pregnant  with  profit ; 
the  greater  part  of  its  value  is  of  course  merely  an  equivalent 
for  the  value  of  the  materials  spent  in  producing  the  goods, 

' J.  S.  Mill,  Political  Economy,  I.  c.  iv.  § 1. 

2 Mill’s  view  is  that  this  question  must  be  answered  by  considering  what  the 
manufacturer  intends  to  do  with  his  money,  and  with  ttie  proceeds  of  his  goods 
when  he  has  sold  them.  “The  distinction  between  capital  and  not-capital  lies 
“ in  the  mind  of  the  capitalist — in  his  will  to  employ  wealth  for  one  purpose 
“ rather  than  another.”  I agree  that  we  should  take  the  intention  of  the  owner 
of  wealth,  rather  than  the  consequences  of  his  acts,  to  determine  whether  that 
wealth  is  or  is  not  capital ; but  it  is,  I think,  more  according  to  analogj'  to 
regard  the  wealth  as  becoming  capital,  not  when  the  owner’s  intention  is  formed, 
but  when  it  is  executed ; that  is,  not  when  the  wealth  is  “ destined  ” for  profit- 
able employment,  but  when  it  is  actually  used  for  this  purpose. 


CHAP.  V 


CAPITAL 


129 


the  wear  and  tear  of  the  instruments  used,  the  wages  of  the 
labourers  employed,  and  other  incidental  expenses  of  produc- 
tion ; but,  so  long  as  the  indiistry  is  prospering,  there  is  always 
a surplus  which  should  be  viewed  as  potential  profit,  to  become 
actual  when  the  goods  are  sold. 

I 2.  In  any  case,  when  we  are  defining  capital  from  the 
individual’s  point  of  view,  we  must  reject  as  too  restricted  the 
definition  of  capital  adopted  by  Ricardo,  James  Mill,  and  others, 
which  states  it  to  consist  of  “ the  food  and  other  articles  con- 
“ sumed  by  the  labourers,  the  raw  material  on  which  they 
“ operate,  and  the  instruments  of  all  sorts  which  are  employed 
“in  aiding  their  labours From  a social  point  of  view  the 
line  drawn  by  this  definition  is  very  important,  by  whatever 
term  we  may  decide  to  express  it : but  obviously,  finished 
goods  that  are  luxuries,  and  so  cannot  be  regarded  as  a ne- 
cessary part  of  the  consumption  of  producers,  for  example, 
stocks  of  gold-lace,  champagne,  velvet,  &c.,  nevertheless  form 
some  part  of  the  wealth  employed,  and  successfully  employed, 
for  a profit  by  manufacturers  and  traders. 

Further,  from  the  same  point  of  view  the  definition  of  capital 
would  seem  clearly  to  include  land  as  being,  to  a great  extent, 
wealth  employed  so  as  to  obtain  profit  for  the  individual  owner 
or  tenant ; hence  it  is  rather  surprising  that  English  economists 
generally  agree  in  making  an  unqualified  separation  between 
land  and  capital^.  Partly,  perhaps,  they  may  have  been  uncon- 
sciously influenced  by  the  older  “ mercantilist  ” view  of  capital 
(still  lingering  in  common  thought  and  discourse),  which  con- 
ceived it  by  preference  as  money : since  land  is  the  one  kind  of 
wealth  which — even  when  the  Mercantile  System  was  in  fullest 
sway — was  always  broadly  distinguished  from  money.  The 
mode,  however,  in  which,  for  the  most  part,  they  have  formally 
tried  to  distinguish  capital  from  land,  is  by  introducing  a new 

1 James  Mill,  Elements  of  Political  Economy,  c.  i.;  cf.  Eieardo,  c.  v. 

^ In  c.  VII.  of  the  following  Book,  I shall  examine  the  grounds  for  this 
distinction  between  capital  and  land  in  the  theory  of  distribution.  Here 
I will  only  point  out  that  in  considering  the  various  industries  in  which  land  is 
employed,  it  would  often  be  equally  unusual  and  inconver  lent  not  to  be  able  to 
speak  of  the  producers  as  having  a certain  portion  of  their  capital  in  the  form  of 
land.  Take,  for  instance,  the  case  of  a railway  company;  it  is  manifest  that 
an  important  part  of  the  real  wealth  represented  by  the  nominal  capital  of  the 
cofnpany  consists  of  the  land  on  which  the  lines  run. 

S.  P.  E. 


9 


130 


POLITICAL  ECONOMY 


BOOK  I 


characteristic  into  the  definition  of  capital;  that  namely  of 
being  the  “ saved  produce  of  past  labour.”  But  the  distinction 
can  hardly  be  thus  justified  from  the  individual’s  point  of  view, 
when  it  has  once  been  admitted  that  the  definitions  of  “in- 
“ dividual’s”  and  “social”  capital  do  not  coincide;  for  there  is 
much  other  capital  that  has  not  been  created  by  the  labour  or 
the  saving  of  its  possessor,  and  it  cannot  matter  to  him  whether 
or  not  others  have  laboured  or  saved  to  produce  it. 

Even  when  we  turn  to  regard  capital  from  the  point  of  view 
of  the  community,  if  we  define  it  merely  as  wealth  employed 
productively — i.e.,  in  adding  utility  to  matter — we  must  of 
course  include  land  as  the  great  primary  instrument  and  source 
of  materials  for  human  industry.  But  this  definition  is  not  the 
one  most  suitable  for  the  purposes  of  the  present  discussion. 
If  we  are  to  consider  capital  as  an  aid  in  the  application  of 
man’s  labour  to  his  material  environment  for  the  satisfaction 
of  his  wants,  we  clearly  cannot  define  the  term  so  as  to  include 
this  environment  itself  in  its  unlaboured  condition;  and  we  must, 
therefore,  restrict  it  to  such  utilities — whether  attached  to  land 
or  otherwise — as  result  from  the  modification  of  the  environ- 
ment by  human  labour*.  Among  these  utilities  we  must  cer- 
tainly include  in  capital  from  the  social  no  less  than  from  the 
individual’s  point  of  ^'iew  those  embodied  in  the  finished  pro- 
ducts of  which  I before  spoke.  For  we  have  seen  reason  to 
extend  the  term  Production  to  the  whole  process  of  conveying 
wealth  into  the  hands  of  the  consumer ; and  it  is  evident  that  if 
champagne  and  velvet  are  to  form  part  of  the  produce  that  is 
annually  consumed,  the  whole  aggregate  of  wealth  employed  in 
the  process  of  “ producing  ” it  must  always  include  a certain 
amount  of  champagne  and  velvet  ready  for  sale,  in  the  hands  of 
wine-growers,  manufacturers,  merchants,  and  retail  tradei's. 

§ 3.  In  the  last  paragraph  I applied  the  tenn  “ capital  ” to 
the  utilities  resulting  from  labour  embodied  in  what  are 

1 Accordingly  the  continual  adaptation  of  the  earth  to  human  uses,  which  in 
the  preceding  chapter  has  been  stated  as  one  of  the  conditions  of  increasing 
production,  is  to  be  regarded  as  an  accumulation  of  capital. 

In  accepting  the  proposition  that  capital  is  the  result  of  labour,  I must 
guard  myself  from  being  supposed  to  accept  implicit^'  the  doctrine  that  the 
value  of  capital  or  of  other  wealth  is  due  solely  to  labour.  As  we  shall  here- 
after see,  there  are  cases  when  the  labour  employed  is  insignificant  compared  to 
the  value  of  its  product. 


CHAP.  V 


CAPITAL 


131 


commonly  called  “ products  ” rather  than  to  these  “ products  ” 
themselves.  And  this  seems  to  me  the  most  proper  use  of 
the  term,  though  custom  and  convenience  render  it  undesirable 
to  adhere  to  it  strictly;  since  if  we  define  capital  so  as  to  exclude 
land,  in  its  unlaboured  condition,  consistency  requires  us  equally 
to  exclude  the  matter  of  all  movable  wealth — as  distinct  from  the 
new  relations  of  that  matter  due  to  human  volition.  We  must 
now  observe  that  the  results  of  past  labour — such  as  the  labour 
of  a consulting  chemist  whose  advice  is  taken  on  the  processes  of 
a manufacture — may  be  as  permanently  productive  as  the  labour 
of  manual  workers ; though  we  could  hardly  say  that  the  results 
of  the  chemist’s  work  were  “ embodied  ” in  the  plant  of  the 
manufacture*.  Still  less  should  we  say  this  of  the  labour  of 
the  lawyer  who  defends  a railway  project  before  a Parliamentary 
Committee,  or  of  the  “ promoters  ” who  float  the  shares  of  a new 
company ; yet  if  the  employment  of  this  labour  is  either  abso- 
lutely indispensable,  or  is  the  most  economical  mode  of  starting 
the  new  business,  the  mere  immateriality  of  its  results  seems 
an  irrelevant  reason  for  establishing  a distinction  between 
it  and  the  labour  spent  in  the  physical  construction  of  ‘the 
instruments  used  in  the  business.  When  we  ask  what  the 
shareholders  have  got  for  the  money  paid  up,  the  complete 
answer  is  not  given  by  enumerating  the  buildings  and  in- 
struments ; we  must  add  that — through  the  labours  of  lawj^ers, 
promoters,  &c. — they  have  got  a working  concern ; and  if  the 
concern  is  a profitable  one,  we  have  just  as  much  ground  for 
including  the  immaterial  part  of  its  construction  in  the  capital 
of  the  community,  as  we  have  in  the  case  of  the  material  part. 

This  leads  me  to  consider  a source  of  profit,  noticed  in 
a preceding  chapter,  which  exhibits  the  immaterial  residts  of 
labour  and  expenditure  as  still  more  clearly  separate  from  any 
material  capital  than  in  the  cases  just  discussed.  I mean  the 
saleable  article,  called  “ goodwill  ” or  “ business  connexion.” 
Let  us  take  for  example,  the  business  of  publishing  a news- 
paper. The  sale  of  a newspaper  when  it  first  starts  is  ordinarily 
so  limited  that  its  proceeds  do  not  repay  the  current  expenses 

1 It  is  not  easy  to  draw  a clear  line  between  the  results  of  labour  that  are, 
and  those  that  are  not,  “embodied”  in  matter;  and  I have  not  thought  it  worth 
while  to  complicate  the  discussion  by  trying  to  draw  it  exactly,  since  the  drift  of 
my  argument  is  that  it  is  manifestly  unimportant. 


9—2 


132 


POLITICAL  ECONOMY 


BOOK  I 


of  production ; so  that  the  business  has  to  be  carried  on  for 
some  time  at  a loss.  Hence,  in  order  that  the  undertaking 
should  be  on  the  whole  a profitable  one,  it  is  necessary  that 
the  proceeds  of  the  sale  should  ultimately  be  sufficient  to  pay 
profit,  not  only  on  the  material  capital  actually  employed  in 
production,  but  upon  all  the  wealth  and  labour  that  has  been 
spent  without  return  in  the  earlier  years  of  the  undertaking. 
The  business  may  be  regarded  as  having  capital  sunk  in  it, 
which  would  be  recovered  in  its  price,  if  it  came  to  be  sold ; 
though  it  is  actually  represented  merely  by  a certain  habit 
of  purchasing  the  newspaper  that  exists  in  the  community 
at  large.  This  potential  price  is  properly  reckoned  as  part 
of  the  wealth  and  capital  of  the  individual  owning  the  busi- 
ness ; and  so  far  as  the  establishment  of  such  habits  of  pur- 
chasing are  useful  to  the  community — but  only  so  far — we  may 
also  regard  them  as  a part  of  “ social  capital.” 

A striking  example  of  the  definite  value  of  this  source  of 
profit  is  furnished  by  the  business  of  banking.  A banker’s 
])r()fit  is  largely  derived  from  the  tacit  consent  of  the  com- 
munity to  use  his  obligations  to  pay  money  on  demand  as 
a medium  of  exchange,  equivalent  to  actual  coin.  In  ordinary- 
times,  until  a run  on  the  bank  occurs,  these  obligations  are 
ti'ansferred  from  one  customer  to  another,  without  pajunent 
being  exacted.  Hence,  though  in  estimating  the  banker’s 
wealth  these  obligations  would  be  reckoned  on  the  negative 
sifle,  still,  so  long  as  he  is  not  required  to  meet  them,  he  is  able 
to  take  as  profit  the  whole  or  part*  of  the  interest  which  he 
receives  on  the  wealth,  elsewhere  invested,  by  which  he  would 
meet  his  obligations  if  required.  Thus  he  may  be  only  just 
solvent,  and  yet  be,  so  long  as  his  credit  lasts,  a wealthy  man. 
This  fact,  I conceive,  is  what  is  meant  by  saving  that  the  credit 
of  such  a bank  is  a part  of  its  capital ; and  the  expression  seems 
to  me  legitimate,  provided  we  are  careful  to  point  out  that  such 
capital  is  of  fragile  nature,  liable  to  sudden  destruction  in  case 
of  a ])anic.  And,  as  we  saw,  there  are  strong  reasons  for  re- 
garding bankers’  credit  generally  as  an  addition  to  the  resources 
of  the  country;  since  the  country  gains  by  means  of  it  a medium 
of  exchange,  which  it  costs  very  little  to  produce  and  maintain. 


Part  only,  if  he  has  to  pay  interest  on  the  money  that  he  owes. 


CHAP.  V 


CAPITAL 


133 


and  which  at  the  same  time  is  for  some  purposes  even  more 
useful  than  coinh 

I 4.  We  thus  see  that  the  results  of  labour  may  persist 
in  various  forms — mateiial  and  immaterial — which  we  may  call 
“ investments  ” of  capital : and  in  following  the  normal  process 
of  any  manufacture,  we  can  observe  how  at  each  stage  of  the 
process  a considerable  portion  of  the  capital  employed  changes 
its  form,  passing  from  raw  material  to  half-finished  products, 
then  becoming  goods  finished  and  ready  for  sale,  then  through 
sale  turning  into  money  and  so  into  raw  material  again.  The 
question  is  thus  suggested  whether  the  productive  skill,  that 
results  from  wealth  laid  out  in  education  and  is  an  indispensable 
factor  in  the  production  of  new  wealth,  is  to  be  classed  among 
the  forms  in  which  capital  may  exist.  I have  already  pointed 
out  that  such  skill,  not  being  transferable,  lacks  one  of  the  cha- 
racteristics that  common  usage  regards  as  essential  to  wealth. 
Still,  it  is  evident  that  the  wealth  spent  in  producing  such  .skill 
may  be  as  profitably  employed,  both  for  the  individual  and 
for  the  community,  as  if  it  were  invested  in  inanimate  instru- 
ments; and  if  this  outlay  has  been  incurred  with  a view  to 
gain,  I think  we  should  regard  it  as  a form  of  investment  of 
capital ; though  it  will  be  well  to  denote  its  results  by  some 
such  term  as  “ personal  capital,”  to  express  their  peculiar  cha- 
racteristic of  non-transferability. 

Similarly  we  might  extend  the  term  Capital  to  include  all 
the  wealth  consumed  from  infancy  upwards  by  productive 
workers,  so  far  as  it  has  been  serviceable  in  developing  or 
maintaining  productive  qualities — physical  strength  as  well  as 
skill ; and  we  might  regard  the  productive  vigour  that  results 
fi:om  this  consumption  as  a form  in  which  social  ca])ital  is 
actually  existing.  And  if  we  define  cajjital,  from  a social  point 
of  view,  merely  as  wealth  employed  so  as  continually  to  re- 
produce itself  with  a (social)  profit,  we  ought  in  consistency 
to  take  this  view.  I think,  however,  that  for  the  purposes  of 
the  Theory  of  Production  we  usuall}'  require  a more  resti-icted 

^ It  may  be  urged  that  the  credit  that  is  the  immaterial  source  of  tliis  useful 
commodity  is  not  the  result  of  labour ; but  a man  cannot  get  his  obligations 
currently  accepted  as  a medium  of  exchange,  unless  he  goes  into  banking  as 
a business  ; and  a banking  business  cannot  be  created  at  one  stroke,  or  unless 
the  place  and  time  for  starting  it  be  skilfully  selected,  nor  can  it  be  maintained 
without  careful  management — not  to  speak  of  the  labour  of  subordinates. 


134 


POLITICAL  ECONOMY 


BOOK  I 


conception  of  capital:  we  have  to  consider  it  as  a joint 
factor  with  labour  in  social  production,  by  the  aid  of  which 
the  labourers  of  the  community  are  enabled  to  produce  more 
than  they  would  otherwise  do ; and  in  order  to  keep  this  view  of 
it  clear,  we  have  to  maintain  the  distinction  between  capital  and 
labourers,  just  as  we  have  to  maintain  the  distinction  between 
capital  and  land — or  man’s  material  environment — in  its  un- 
laboured condition.  For  this  purpose,  therefore,  we  must  regard 
as  social  capital  not  all  the  results  of  labour  that  are  employed 
so  as  to  produce  a social  profit ; but  only  such  results  as  would 
not  exist  in  their  present  form,  or  would  not  be  used  in  their 
present  manner,  except  as  a means  to  this  end.  On  this  ^iew 
it  is  only  so  far  as  the  labourer’s  consumption  is  distinctly 
designed  to  increase  his  efficiency,  that  it  can  properly  be 
regarded  as  an  investment  of  capital.  No  doubt,  if  an  in- 
dividual' adopts  a more  expensive  diet  in  order  that  he  may 
be  enabled  to  work  harder  without  injury  to  health,  the 
increase  in  his  expenditure  thus  caused  is  for  all  economic 
purposes  similar  to  outlay  on  fuel  or  other  auxiliary  materials 
in  a manufacture.  Similarly,  if  statesmen  or  philanthropists 
are  considering  the  desirability  of  measures  tending  to  increase 
the  labourers’  share  of  food,  clothing,  house-room,  &c.,  they  may 
fairly  recommend  this  outlay  as  having  the  essential  character- 
istics of  an  investment  of  capital  for  the  community,  so  far  as 
it  may  be  reasonably  expected  to  lead  to  more  vigorous  and 
effective  labour.  But,  generally  speaking,  we  must,  I think, 
regard  the  consumption  of  produce,  for  the  preservation  or 
enjoyment  of  life,  as  the  final  end  of  the  series  of  changes  that 
make  up  the  process  of  production ; and  accordingly  must 
distinguish  it  broadly  from  consumption  that  would  not  be 
incurred,  except  as  a means  to  further  production ; treating 
as  a gift  of  nature  any  undesigned  gain  in  productive  effi- 
ciency that  may  result  fi-om  ith 

It  is  not  of  course  denied  that  the  products  consumed  by 
the  labourers  will,  generally  speaking,  have  previously  formed 
part  of  the  capital  of  individual  capitalists.  But,  ob^iousl}', 

1 It  must  be  admitted  that  social  capital  as  above  defined  is  something  that 
we  cannot  measure  exactly.  But  it  is  in  any  case  impossible  to  estimate  other- 
wise than  very  roughly  the  amount  of  aid  that  the  community  derives  from  the 
results  . of  previous  labour. 


CHAP.  V 


CAPITAL 


135 


they  can  no  longer  form  part  of.  the  employer’s  capital  after  he 
has  exchanged  them  for  the  results  of  the  labourer  s work,  what- 
ever that  may  be ; for  these  results — in  the  form  of  extracted 
products,  half-finished  or  finished  goods,  &c. — have  become  the 
new  form  of  that  part  of  his  capital  which,  before  the  exchange, 
was  in  the  form  of  money  or  commodities  destined  for  wages*. 
Even  if  the  labourers  are  fed  at  the  capitalist’s  own  table  the 
case  is  not  substantially  altered ; only  the  moment  at  which 
the  food  ceases  to  be  employer’s  capital  is  deferred  until  the 
time  at  which  it  is  actually  eaten. 

§ 5.  Here  I may  observe  that  there  is  something  misleading 
in  the  manner  in  which  economists  have  spoken  of  capital  as 
being  “accumulated,”  and  at  the  same  time  have  put  forward, 
as  the  prominent  and  typical  form  of  capital,  the  food,  clothing, 
and  other  commodities  which  the  labourer  consumes.  For 
though,  as  we  have  seen,  there  must  always  be  a certain  stock 
of  such  commodities,  finished  but  undistributed,  which  forms 
a part  of  the  capital  of  manufacturers  and  traders ; still  the 
accumulation  of  capital,  that  industrial  progress  brings  with  it, 
does  not,  to  any  important  extent,  consist  in  an  increase  of  this 
stock.  Indeed,  one  of  the  economic  advantages,  which  the 
improvement  of  the  machinery  for  conveyance  brings  v/ith  it, 
lies  in,  the  diminution  of  the  amount  of  these  stocks  which 
it  becomes  necessary  to  keep.  What  is  really  accumulated 
is  mainly  the  results  of  labour  in  the  form  of  what  we  may 
call  generally  instruments  to  make  labour  more  efficient — 
including  under  the  notion  of  instruments  all  buildings  used 
in  prodiiction,  and  all  improvements  of  land. 

It  may  assist  to  make  this  clearer  if  we  conceive  the  com- 
munity to  be  organised  on  a socialistic  basis,  its  industry  and 
the  actual  distribution  of  its  commodities  remaining  in  other 
respects  unaltered : that  is,  if  we  suppose  the  instruments  and 
materials  of  production  to  be  owned  by  a government,  which 
from  time  to  time  distributes  the  finished  goods  among  the 
citizens,  giving  to  the  rich  the  luxuries  that  they  now  enjoy,  on 
account  (let  us  suppose)  of  their  superior  deserts.  Such  a com- 

1 Some  writers  seem  to  me  to  fall  into — or  at  least  to  suggest — -the  serious 
confusion  of  regarding  both  the  real  wages  of  the  labourer  and  the  results  of  his 
labour  for  which  these  wages  are  exchanged,  as  being  at  the  same  time  parts  of 
the  capital  of  his  employer. 


136 


POLITICAL  ECONOMY 


BOOKt 


munity,  if  governed  with  wisdom,  and  ^vith  due  regard  for  the 
interest  of  posterity,  would  continue  the  accumulation  of  capital 
that  is  at  present  going  on ; that  is,  it  would  allot  a certain 
portion  of  its  produce  to  labourers  employed  in  improving  land, 
constructing  railways,  and  other  work  yielding  no  immediate 
return  of  consumers’  wealth.  But  it  would  be  obviously  forced 
and  inappropriate  to  say  that  the  produce  so  allotted  was 
“saved”  or  “accumulated”  and  to  call  it  therefore  capital. 
What  would  really  be  accumulated  would  be  the  railways, 
the  machines,  the  additional  productiveness  of  the  land,  &c. ; 
or,  to  put  it  generally,  the  intermediate  results  of  labour  em- 
ployed for  remote  ends,  so  that  a possible  increase  in  the 
immediate  produce  of  consumable  commodities  is  sacrificed 
for  a greater  increase  in  the  ultimate  produce.  That  the 
increase  must  ultimately  be  greater,  unless  the  capital  is 
wasted,  is  of  course  implied  in  the  conception  of  capital  as 
auxiliary  to  labour. 

No  doubt,  in  our  actual  individualistic  society,  this  accu- 
mulation of  instruments  is  brought  about  chiefly  by  the  action 
of  individual  capitalists ; who  abstain  from  consuming  the  whole 
of  their  profits,  in  order  to  get  more  profit  hereafter  for  them- 
selves and  their  heirs.  Hence  it  is  a legitimate  fiction  to 
regard  them  as  taking  a part  of  their  share  in  the  food, 
clothing,  &c.,  that  constitute  the  real  wages  of  their  labourers ; 
and  to  consider  this  accordingly  as  the  primary  form  in  which 
capital  always  has  existed,  although  the  fonn  in  which  most 
of  it  ultimately  exists  is,  as  we  have  seen,  that  of  instruments. 
But  we  must  take  care  not  to  imply  that  all  or  even  a large 
part  of  capital  could  exist  simultaneously  in  this  form ; or  that 
it  would  be  no  loss  to  the  community  if  the  capital  in  the  form 
of  instruments  were  destroyed,  provided  it  were  supplied — say 
from  abroad — with  an  equal  amount  of  capital  in  the  form  of 
the  current  means  of  sustenance^ 

And  we  must  bear  in  mind  that  the  applicability  of  this 

* No  doubt  the  instruments  could  all  be  made  over  again  in  time,  provided 
the  labourers  could  be  supported  while  making  them;  but  obviously  their  labour 
would  be  of  greatly  inferior  efficiency  during  the  period  that  would  elapse  until 
the  instruments  were  made : hence  we  must  regard  the  form  “ instruments  ” — 
in  the  extended  sense  before  mentioned — as  that  in  which  the  greatest  part  of 
capital  must  necessarily  exist,  if  capital  is  duly  to  fulfil  the  function  of  increasing 
the  efficiency  of  labour. 


CHAP.  V 


CAPITAL 


137 


conception  of  the  primary  form  of  capital  depends  not  on  the 
necessary  conditions  of  the  production  of  wealth,  but  upon  the 
actual  conditions  of  its  distribution.  The  essential  point  in  the 
formation  of  capital  is  the  employment  of  labour  for  remote 
ends,  not  the  saving  of  sustenance  in  order  that  it  may  be 
employed  as  the  real  wages  of  hired  labourers ; and  a good  deal 
of  the  actual  capital  of  any  civilised  community,  for  example, 
roads  and  bridges,  while  it  is  the  result  of  labour  diverted  from 
the  supply  of  immediate  needs,  has  not  been  produced  by  labour 
hired  with  a view  to  profit.  At  the  same  time,  it  should  be 
clearly  recognised  that  in  the  existing  economic  condition  of 
society  the  employment  of  labour  in  making  instruments  is 
principally  due  to  the  voluntary  action  of  persons  who,  having 
the  alternatives  of  “saving”  and  “spending”^  presented  to 
them,  prefer  the  former;  and  a fundamentally  important  part 
of  the  process  initiated  by  their  “ saving  ” consists  in  the 
transfer  of  food,  clothing,  &c.,  from  the  stocks  of  tradei's  to 
labourers,  in  return  for  the  transfer  to  their  employers  of  the 
results  of  their  labour. 

§ 6.  So  far,  in  speaking  of  capital  I have  only  had  in 
view  what  in  a previous  chapter  I have  called  “producers’ 
“wealth”:  that  is,  I have  implicitly  followed  Adam  Smith®  in 
distinguishing  from  capital  that  portion  of  the  “general  stock 
“ of  any  society  ” which  is  “ reserved  for  immediate  consumption, 
“ but  not  yet  entirely  consumed,”  on  the  ground  that  it  “ does 
“ not  afford  a revenue  or  profit.”  The  distinction  is  obvious,  and 
should  be  continually  kept  in  view ; but  reflection  will,  I think, 
shew  that  it  is  less  fundamental  than  is  commonly  supposed. 

This  will  be  most  easily  seen  if  we  begin  by  considering  the 
class  of  products  which  we  have  already  distinguished  as  “durable 
“ consumers’  wealth  ” — houses,  furniture.  Such  things,  says 
Adam  Smith,  may  yield  a revenue  to  their  owner,  if  they  are 
let  or  hired  out,  and  so  “ serve  the  function  bf  a capital  to  him,” 
but  they  cannot  yield  any  revenue  to  the  community ; they  are 
gradually  consumed  without  replacement,  whereas  the  capital 
employed  in  production,  if  prudently  invested,  is  continually 
replacing  itself  with  a profit.  But  it  will  appear  I think,  on 
closer  examination,  that  the  notion  of  “ wealth  replacing  itself 

’ That  is,  spending  in  luxuries  for  themselves  or  their  families. 

^ Wealth  of  Nations,  Book  II.  c.  i. 


138 


POLITICAL  ECONOMY 


BOOK  I 


“ with  a profit  ” is  ambiguous,  and  that  so  far  as  it  is  applicable 
to  (at  least)  a large  part  of  the  capital  employed  in  industry,  it 
is  no  less  oplicable  to  the  durable  consumers’  wealth  that  I am 
now  considering.  For  at  least  a large  part  of  the  wealth 
employed  in  production — namely,  all  instruments  and  auxiliary 
materials  employed  in  the  production  of  luxuries,  and  even 
products  consumed  by  labourers  if  engaged  in  producing  luxuries 
— can  only  be  said  to  “ replace  itself  with  a profit  ” in  the  sense 
that  the  consumable  utilities  which  it  is  the  means  of  producing 
have  a higher  exchange  value  than  the  wealth  destroyed  in  pro- 
ducing them — so  that  a portion  of  the  price  of  the  produce  is 
sufficient  to  compensate  for  the  consumption  of  materials  and 
the  deterioration  and  depreciation  of  instruments.  And  in  this 
sense  the  wealth  invested  in  a house  may  with  equal  truth 
be  said  to  replace  itself  Avith  a profit ; for  if  we  value  the 
annual  use  of  a house ' ’at  its  market-price,  we  shall  find — 
if  the  house  has  been  economically  purchased — that  after 
subtracting  ordinary  interest  on  its  original  price  a sufficient 
quantum  of  value  will  remain  to  compensate  for  its  deterioration. 

In  short,  the  essential  characteristic  of  the  aid  that  capital 
in  the  form  of  instruments  gives  to  labour  is  that,  by  inter- 
posing an  interval  of  time  between  the  application  of  labour 
{i.e.,  of  the  labour  spent  in  making  the  instrument)  and  the 
enjoyment  of  its  result,  the  utility  produced  is  ultimately 
greater  than  it  would  have  been  if  the  labour  had  been  spent 
in  some  manner  yielding  more  rapid  returns : and  this  cha- 
racteristic is  no  less  present  in  the  case  where  a certain  kind 
of  utility — as  that  of  shelter,  &c. — can  only  be  obtained  by 
making  a durable  article  that  will  be  useful  for  many  years*. 

* So  far  as  the  alternatives  of  making  a more  or  less  durable  house  are 
presented,  the  question  whether  it  will  be  economically  advantageous  to  spend 
the  extra  labour  required  for  the  more  durable  building  is  clearly  similar  to  the 
question  that  arises  (as  we  have  already  observed)  in  considering  whether  an 
instrument  that  is  undeniably  useful  is  also  profitable;  we  have  to  consider 
in  either  case  whether  the  additional  utility  is  worth  purchasing  at  the  price  of 
the  additional  labour,  taking  into  account  the  time  that  must  elapse  between  the 
application  of  the  labour  and  the  consumption  of  the  utility.  No  doubt  up 
to  a certain  point  these  alternatives  are  not  presented ; there  is  an  irreducible 
minimum  of  durability  which  a house  must  possess,  in  order  that  the  utilities 
derived  from  it  may  be  obtained  at  all : but  a similar  irreducible  minimum  is 
found  in  the  case  of  producers’  wealth — we  cannot  have  corn  at  all  without 
some  kind  of  plough. 


CHAP.  V 


CAPITAL 


139 


And  the  same  may  be  said  of  all  durable  products  from  which 
we  expect  to  derive  continued  or  repeated  utilities  in  the 
future ; the  thing  itself  in  relation  to  its  future  utilities  has 
the  essential  characteristics  of  capital.  The  difference  between 
the  case  of  wealth  that  is  employed  and  valued  as  a means 
of  obtaining  other  wealth,  and  that  of  wealth  from  which  we 
only  expect  future  utility  and  which  is  only  valued  in  view 
of  produce  to  be  hereafter  enjoyed,  is,  as  I have  said,  of 
great  importance ; we  may  perhaps  represent  it  by  designating 
the  former  as  “ producers’  capital  ” and  the  latter  as  “ con- 
“ sumers’  capital.”  But  in  making  this  distinction  we  must 
bear  in  mind  that  many  most  important  instruments  that 
are  “producers’  capital”  from  the  individual’s  point  of  view 
are  at  least  partly  “ consumers’  capital  ” from  the  point  of 
view  of  the  community, — such  as  railways  and  steamships, 
so  far  as  they  carry  tourists,  and  merely  furnish  the  imma- 
terial commodity  of  a desired  change  of  place. 

And  further;  even  the  consumers’  stocks  of  food,  fuel,  and 
other  things  consumed  in  a single  use,  have  in  a certain  sense, 
so  far  as  their  amount  is  economically  regulated,  the  essential 
characteristics  of  capital.  Such  commodities  do  not,  indeed, 
usually  increase  in  utility  by  being  kept,  but  are  rather  liable 
to  deterioration : still,  so  far  as  they  are  prudently  kept  they 
save  the  labour  of  multiplied  purchases  and  journeys  which 
would  otherwise  be  necessary.  The  keeping  of  such  stocks 
is,  therefore,  as  essentially  a labour-saving  expedient  for  the 
individual  as  the  use  of  an  instrument  in  production.  The 
stocks  in  the  hands  of  manufacturers  and  traders  fulfil  a similar 
function  for  the  community;  the  social  advantage  of  having 
more  or  less  of  such  stocks  is  to  be  measured  by  the  extent 
to  which  their  existence  either  saves  the  labour  of  sale  and 
conveyance,  or  increases  the  utility  of  the  commodity  by  equal- 
ising its  consumption,  or  renders  the  labour  of  manufacture 
more  productive  by  enabling  it  to  be  more  continuous  and 
uniform,  and  organised  on  a larger  scale,  than  would  other- 
wise be  the  caseh  And  as  we  saw,  it  is  only  so  far  as  they 

^ Here  too  there  is  an  irreducible  minimum.  Corn  and  other  agricultural 
products  must  be  kept  between  one  harvest  and  another,  in  order  that  they  may 
be  continuously  consumed : and  in  other  cases  we  should  often  have  to  go 
without  things  altogether,  if  there  were  no  stocks. 


140 


POLITICAL  ECONOMY 


BOOK  I 


are  thus  useful  that  the  community  gains  from  the  “ accu- 
“ mulation  ” of  such  products. 

It  would  seem  then  that  the  term  “ capital,”  in  its  scientific 
application,  is  most  appropriately  used  to  express  an  aspect 
which  all  accumulated  wealth  presents — so  far  as  it  is  pro- 
duced and  used  with  due  regard  to  economy^ — up  to  the  verj- 
moment  of  consumption : as  being,  namely,  the  intermediate 
result  of  labour  expended  for  the  sake  of  future  utility  which, 
when  realised,  is  in  some  way  or  other  greater,  in  consequence 
of  the  postponement  in  its  realisation,  than  it  would  other%vise 
have  been. 

§ 7.  Hence,  when  it  is  said  that,  in  a given  society  at  a given 
time,  an  invention  tending  admittedly  to  render  labour  more 
productive  cannot  be  carried  into  effect  for  want  of  capital, 
the  essential  fact  implied,  from  a social  point  of  view,  is  that 
the  community  cannot  or  will  not  spare  the  required  labour 
from  work  more  immediately — though  less  ultimately — pro- 
ductive. In  our  existing  societies,  however,  the  future  gain  of 
labour  thus  spared  for  the  making  of  new  capital  does  not 
usually  accrue  to  the  labourer  personally;  but  to  others  who 
purchase  the  results  of  his  labour  ^\dth  money  which  might 
have  been  employed  in  purchasing  an  equivalent  amount  of 
directly  consumable  commodities,  and  who  are,  therefore,  said 
to  save  ” whatever  addition  is  thus  made  to  the  real  capital 
of  the  community. 

Though,  as  we  saw  in  the  preceding  chapter,  the  progre.ss  of 
invention — including  the  developments  of  the  great  system  of 
co-operation  through  exchange — does  not  necessarily  increase 
the  need  of  capital,  it  has,  on  the  whole,  tended  continuously 
and  decidedly  in  this  direction : the  increase  in  the  amount  of 
consumable  comnujdities  obtainable  by  a given  amount  of 
civilised  labour  has  been  attended  by  a continual  increase  in 
the  amount  of  real  capital  required  to  furnish  these  com- 
modities to  the  consumer.  And  since,  further,  one  feature  of 
this  progress  has  consisted  in  the  organisation  ot  businesses — on 
the  whole,  though  with  important  exceptions — on  a continualh" 
increasing  scale,  the  capital  has  been  required  in  continually 

1 It  should  be  admitted  that  this  aspect  is  actually  presented,  for  the  most 
part,  in  a less  degree  by  consumers’  capital  than  it  is  by  producers’  capital; 
inasmuch  as  the  former  is  commonly  managed  with  a less  strict  regard  to 
economy.  This  difference,  however,  is  by  no  means  universally  to  be  found. 


CHAP.  V 


CAPITAL 


141 


larger  masses  under  single  management.  This  aggregation 
of  capital  has  been  partly  brought  about  by  the  successful 
industry  of  capitalist  employers,  who  have  extended  their  busi- 
nesses by  means  of  their  own  increasing  wealth : but  to  a large 
extent  the  new  capital  has  resulted  from  the  savings  of  persons 
who  either  have  not  been  employers  of  capital  to  any  extent  or 
have  been  unable  to  employ  it  profitably  in  their  own  busi- 
nesses. In  this  case  the  capital  has  been  chiefly  collected 
either  (1)  by  borrowing — largely  through  the  medium  of  banks 
— or  (2)  by  the  union  of  several  small  portions  of  capital  in 
joint-ownership,  mainly  on  the  basis  of  limited  liability.  In 
both  these  ways  vast  masses  of  capital  have  been  placed  in  the 
hands  of  persons  better  able  than  their  owners  to  employ  them 
productively,  and  industrial  enterprise  has  been  greatly  pro- 
moted; but  with  the  serious  drawback  that  the  employers  of 
other  people’s  capital  have  less  motive  for  using  it  skilfully 
and  carefully  than  they  would  have  if  they  owned  it.  This 
drawback  is  specially  important  in  the  case  of  joint-stock 
companies;  as  persons  who  form  these  are,  for  the  most  part, 
industrial  experts  obtaining  capital  from  non-experts ; whereas 
producers  who  have  obtained  loans  or  discounts  from  banks — 
while  substantially  they  may  I regarded  as  employing  capital 
belonging  to  the  depositors  and  note-holders  who  are  the 
creditors  of  the  banks — yet  do  this  through  the  intervention  of 
persons  professionally  concerned  to  refuse  reckless  or  untrust- 
worthy borrowers.  Accordingly,  the  loss  of  capital  through 
reckless  or  unskilful  management  on  the  part  of  joint-stock 
companies  tends  to  be  considerable ; — not  to  speak  of  the  oppor- 
tunities that  they  have  afforded  for  the  deliberately  fraudulent 
acquisition  of  wealth  under  the  pretext  of  productive  enter- 
prise. Still,  however  the  balance  of  disadvantages  and  ad- 
vantages may  lie  as  regards  businesses  of  smaller  dimensions, 
at  any  rate  the  capital  required  for  the  great  enterprises  of 
modern  industry — such  as  canals  and  railways,  water- works  and 
gas-works,  and  the  modern  developments  of  banking— could 
hardly  have  been  brought  together  except  by  some  form 
of  joint-ownership,  and  consequently  delegated  management ; 
whether  the  joint-ownership  be  that  of  a voluntary  association 
of  individuals,  or  of  the  compulsory  association  which  we  call 
the  state. 


CHAPTER  VI. 


LAWS  OF  PRODUCTIOX. 

§ 1.  In  Chapter  iv.  we  were  occupied  in  surveying  the 
causes  of  variation  in  the  productiveness  of  labour  in  different 
ages  and  countries.  We  first  distinguished  and  briefly  analysed 
the  conditions  of  man’s  material  environment  that  are  favourable 
or  adverse  to  production ; and  noted  the  differences  — whether 
original  or  superinduced  by  human  labour — in  the  adaptation  to 
human  uses  of  the  portions  of  land  inhabited  by  different  com- 
munities, and  their  bordei'ing  or  intersecting  rivers  and  seas.  We 
then  passed  to  consider  the  causes  of  variation  in  the  quantity 
and  quality  of  labour  performed,  in  proportion  to  the  number  of 
the  population  supported  by  it.  We  observed  the  imjwrtant 
modifications  in  both  quantity  and  quality  due  (1)  to  the  var}-- 
ing  physical  conditions  of  the  labourer’s  existence,  and  (2)  to 
the  varying  strength  of  his  motives  for  work.  We  analysed  the 
complexity  of  the  elementary  impulses  that  constitute  the 
“ desire  of  wealth  ” for  self  and  family  which  is  undoubtedly  the 
mainspring  of  industry  in  our  actual  societies ; and  noted  the 
manifold  and  complicated  ways  in  which  the  strength  of  this 
resultant  impulse  tends  to  be  modified  by  the  degree  of  civilisa- 
tion, the  political  structure,  the  moral  state,  the  customs  and 
prevalent  opinions  of  any  community  considered  as  a whole,  or 
again  by  the  moral  and  social  influences  predominant  in  special 
classes ; and  especially  by  the  vaiying  extent  and  manner  in 
which  the  industrial  organisation  maintains  the  correspondence 
of  reward  to  exertion.  We  then  examined  this  industrial 
organisation  in  another  aspect,  analysing  the  advantage  ob- 
tained by  the  combination  of  labour, — that  is,  mainly  by  the 
division  of  employments, — and  noting  the  attendant  drawbacks. 


CHAP.  VI 


LAWS  OF  PRODUCTION 


143 


We  further  observed  the  striking  variations  in  the  efficiency  of 
labour  that  are  due  to  intellectual  conditions ; partly  to  differ- 
ences in  the  average  technical  skill  of  the  individuals  actually 
working;  still  more  to  differences  in  the  development  of  the 
industrial  arts— through  invention — in  the  community  as  a 
whole.  Finally  we  have  dwelt  on  the  importance  of  capital ; 
considered  either  in  the  concrete  as  (mainly)  an  already  accu- 
mulated stock  of  instruments  auxiliary  to  labour,  or  more 
abstractly  as  the  power  of  directing  labour  to  the  attain- 
ment of  greater  but  remoter  utilities,  through  the  control 
over  the  produce  of  labour  possessed  by  the  owners  of  ac- 
cumulated wealth. 

We  have  now  to  consider  how  far  we  can  establish  impor- 
tant general  propositions  as  to  the  extent  to  which  these 
different  causes  operate.  It  is  to  such  propositions  that  I 
have  desired  to  restrict  the  term  “ Law-s  of  Production.”  In 
a wider  sense  the  mere  statement  of  a cause  of  the  greater  or 
less  productiveness  of  labour  might  be  called  the  statement  of 
a Law  of  Production;  but  the  description  would  sound  some- 
what ambitious,  and  economists  who  have  propounded  such 
“laws”  have  oi’dinarily  been  understood  to  imply  by  tffe  term 
some  definite  knowledge  as  to  the  quantity  of  effect  to  be 
attributed  to  one  or  more  of  the  different  causes  determining 
production.  It  should  be  observed,  however,  that  the  pro- 
positions thus  denoted  belong  to  two  very  different  classes; 
they  may  be  (1)  abstract  and  hypothetical,  or  (2)  concrete 
and  positive.  That  is,  they  may  either  state  (1)  the  amount 
of  effect  that  any  cause,  supposed  to  be  given  in  quantity  as 
well  as  quality,  would  produce  under  certain  supposed  con- 
ditions, or  tends  to  produce  under  actual  conditions  so  far  as 
it  is  not  counteracted  or  modified  by  the  operation  of  other 
causes;  or  they  may  state  (2)  to  what  extent  any  particular 
cause  has  been  found,  or  may  be  expected,  to  operate  either 
in  human  communities  generally  oi‘  in  the  modern  civilised 
societies  with  which  we  are  primarily  concerned.  The  im- 
portance of  maintaining  the  essential  difference  between  these 
two  species  of  laws  will  appear  in  the  course  of  this  chapter. 

§ 2.  Before,  however,  we  proceed  to  examine  in  detail  the 
chief  laws  (of  either  kind)  that  have  been  propounded  by  econo- 
mists, it  is  necessary  to  recall  those  limitations  to  the  possibility 


144 


POLITICAL  ECONOMY 


BOOK  I 


of  exactly  measuring  the  productiveness  of  labour,  which  our 
previous  discussions  on  the  measure  of  value  and  wealth  have 
led  us  to  notice.  We  saw  that  so  far  as  the  commodities  which 
are  consumed  in  different  communities — or  in  the  same  com- 
munity at  different  times — are  different  in  kind,  a comparison 
between  the  different  amounts  of  produce  in  the  two  cases 
respectively  must  necessarily  reduce  itself  to  a rough  balancing 
of  utilities;  and  that  even  if  the  commodities  are  similar  in 
kind,  but  are  produced  under  such  different  conditions  (of 
demand,  supply,  &c.)  in  the  two  terms  of  the  comparison  as  to 
vary  materially  in  relative  value,  this  variation  introduces  an 
irremediable  element  of  inexactness  into  any  quantitative 
comparison  of  the  two  aggregates  of  wealth  thus  variously 
composed. 

These  inexactnesses  are  not  generally  of  material  importance 
when  we  are  considering  changes  in  the  amount  produced  by  any 
community  at  short  intervals  of  time,  or  are  comparing  neigh- 
bouring countries  similar  in  industrial  and  climatic  conditions : 
but  they  may  easily  become  very  considerable  when  we  are 
trying  to  deal  with  secular  variations,  or  to  include  remote 
countries  in  some  wide  generalisation. 

We  saw  further  that,  even  if  our  result  were  free  from  this 
source  of  inexactness,  it  would  still  have  no  real  significance,  as 
an  answer  to  the  question  which  prompts  us  to  make  the  com- 
parison, if  there  are  any  marked  differences  in  the  primary 
needs  of  the  different  sets  of  human  beings  w'hose  wealth  we 
are  comparing.  And  when  we  consider  the  needs  of  labourers 
as  such  we  see  that  these  needs  vary  with  the  labour  required 
of  them : and  hence  that  we  may  measure  their  productive 
efficiency  either  by  the  total  value  of  the  commodities  produced 
or  by  the  excess  of  this  over  the  value  of  what  they  con- 
sume so  far  as  this  consumption  contributes  to  eflficiencyh 

* As  we  have  already  had  occasion  to  observe,  no  sharp  line  can  be  drawn 
between  necessary  and  superfluous  consumption.  There  is  a broad  margin 
of  expenditure  which  increases  the  productive  efliciency  of  the  persons  who 
benefit  by  it,  though  not  sufficiently  to  make  the  resulting  increment  of  produce 
balance  the  expenditure. 

The  exact  limits-  of  this  margin  seem  to  me  very  difiicult  to  ascertain. 
Who  shall  say  precisely  to  what  extent  the  stimulating  food  and  drink,  com- 
modious dwelhngs,  expensive  amusements  enjoyed  by  the  best  paid  class  of 
skilled  workers  (barristers,  physicians,  men  of  business,  dte.)  contribute  to  the 
more  effective  performance  of  their  functions  ? 


CHAP.  VI 


LAWS  OF  PRODUCTION 


145 


The  latter  measurement  is  suggested  by  the  analogy  of 
the  instruments — especially  the  living  instruments — employed 
by  the  labourers ; since  in  measuring  the  productiveness  of 
useful  animals  we  should  always  consider  not  their  gross  produce 
but  their  net  produce,  after  subtracting  the  value  of  the  food, 
&c.,  consumed  by  them.  The  analogy  is  too  obvious  and  ir- 
resistible to  be  ignored ; and  we  must  admit  this  measurement 
of  the  productive  efficiency  of  labourers  as  valid  for  some 
purposes ; for  instance,  any  employer  who  undertook  to  feed  his 
labourers  would  rightly  use  this  measurement  in  reckonings  of 
his  private  business*.  But,  for  the  reason  given  incidently  in 
the  preceding  chapter,  it  is  not,  I conceive,  the  measurement 
normally  applicable  in  our  present  consideration  of  the  matter 
from  the  point  of  view  of  the  community ; so  far,  that  is,  as  the 
additional  consumption  which  causes  the  additional  efficiency 
is  held  to  be  desirable,  in  itself  or  in  its  results  of  bodily  or 
mental  vigour,  as  an  amelioration  of  the  labourer’s  life  and, 
therefore,  as  an  element  of  the  ultimate  end  to  which  the  whole 
process  of  production  is  a means.  I shall  accordingly  in  the 
present  chapter  mean,  by  the  “ produce  ” of  which  we  are  to 
examine  the  laws,  the  gross  produce  of  consumable  commo- 
dities ; including  along  with  this  whatever  new  ca])ital  may  be 
brought  into  existence  within  the  period  under  consideration. 
This  latter  must  obviously  be  taken  into  account ; as  it  would 
be  absurd  to  regard  the  productiveness  of  labour,  at  any  given 
time  and  place,  as  affected  by  the  question  whether  the  utilities 
resulting  from  it  are  immediate  or  remote-. 

Let  us  then,  taking  in  order  the  conditions  of  greater  or  less 
production  which  have  been  above  enumerated,  consider  how 
far  we  can  lay  down  laws  as  to  the  extent  to  which  these  c-on- 
ditions  either  (1)  are  actually  found  or  may  be  expected  to 
operate  in  increasing  or  diminishing  produce,  or  (2)  would 
operate  in  the  absence  of  counteracting  cause's. 

' It  should  be  observed  that  in  the  calculations  of  private  employers  a 
different  measurement  again  has  commonly  to  be  applied;  the  value  of  what  the 
labourer  produces  has  to  be  compared  not  with  the  value  of  the  materials  of  his 
necessary  consumption,  but  with  the  wages  that  he  is  willing  to  take. 

^ A certain  amount  of  error,  as  was  before  noticed,  may  be  introduced  by 
including  new  “producers’  wealth,”  reduced  to  a common  imaisure  with  directly 
consumable  commodities  by  the  standard  of  exchange  value:  hut  this  element 
of  possible  error  is  not  important  for  our  present  purposes. 

S.  P.  E. 


10 


146 


POLITICAL  ECONOMY 


BOOK  I 


The  first  class  of  conditions  examined  in  Chapter  iv.  have 
not — with  one  important  exception* — been  thought  to  afford 
material  for  the  statement  of  any  general  economic  laws  in  the 
sense  here  explained.  In  the  economic  histor}%  even  in  the 
social  and  political  history,  of  the  human  race,  it  is  doubtless 
indispensable  to  note  the  different  advantages  and  opportunities 
for  production  (including  trade)  presented  by  different  countries. 
Thus  the'  historian  will  point  out  how  the  special  fertility  of 
plains  watered  by  large  rivers,  and  the  facilities  of  conveyance 
afforded  by  these  rivers,  furnished  the  decisively  favourable  con- 
ditions for  the  early  establishment  of  large  societies  in  China, 
Bengal,  Mesopotamia,  and  Egypt  ; how,  again,  to  the  oppor- 
tunities of  communication  provided  in  peculiar  abundance  by  an 
inland  sea  studded  with  islands  and  invaded  by  peninsulas,  may 
be  attributed  that  development  of  trade  in  the  Aegean  and  the 
Mediterranean  generally  which  led  to  the  Graeco-Roman  civilisa- 
tion as  one  of  its  consequences.  These  and  similar  aper^us  are 
of  great  interest  and  importance.  But  the  differences  in  the 
advantages  and  drawbacks  thus  presented  to  human  industr)- 
by  man’s  material  environment  are  so  various  and  complicated, 
and  change  so  continually  as  the  power  of  mankind  to  utilise 
advantages  or  overcome  obstacles  gi'ows  with  the  development 
of  knowledge  and  of  social  organisation,  that  we  cannot  usefully 
attempt  to  frame  any  general  and  definite  quantitative^  state- 
ments as  to  the  various  and  changeful  effect  of  these  conditions 
on  production. 

Again,  the  gradual  changes  that  have  taken  place  in  the 
economic  relation  of  man  to  his  environment,  through  its  adapt- 
ation by  human  labour,  constitute,  for  the  most  part,  merely  a 
special  case  of  the  aid  given  to  labour  by  the  accumulation  of 
capital ; and  will  be  most  appropriately  examined  later  from 
this  point  of  view. 

I pass,  therefore,  to  consider,  as  causes  of  variation  in  amount 
of  produce,  the  differences  that  are  found  in  the  quantity  and 
quality  of  labour  applied,  in  proportion  to  the  number  of  the 
population  consuming  the  produce.  Let  us  take  first  the 
differences  in  quantity.  Here  I do  not  find  that  any  economist 

1 I refer  to  the  effect  of  limited  space  of  land  in  diminishing  the  productive- 
1 ness  of  the  labour  of  the  community  inhabiting  it — as  expressed  in  the  Law  of 
Diminishing  Keturns,  discussed  later  on  in  this  chapter. 


CHAP.  VI 


LAWS  OF  PRODUCTION 


147 


has  thought  it  possible  to  lay  down  concrete  laws  as  to  the 
differences  or  probable  changes  'either  in  the  proportion  of 
workers  to  non-workers  in  civilised  societies,  or  in  the  average 
time  for  which  they  work.  A small  part  of  the  very  complex 
influences  that  we  noted  as  determining  these  quantities  does 
perhaps  admit  of  being  prognosticated;  we  may  predict,  for 
example,  that  civilised  society  will  become  more  deflnitely 
industrial  than  it  has  yet  become  in  European  countries,  and 
thus  the  slight  social  discredit  still  attaching  to  labour  will 
entirely  die  away ; but  the  rate  of  this  change  and  the  amount 
of  effect  it  is  likely  to  produce  appear  to  be  beyond  calculation. 

Again,  as  regards  the  abstract  laws  of  the  relation  of 
“ amount  of  produce  ” to  “ quantity  of  labour,”  we  have  to 
observe  that  the  obvious  arithmetical  law  “ the  more  work 
“ the  more  wealth  ” has  undoubtedly  to  be  qualifled  by  the 
empirical  generalisation  that,  after  a certain  point,  any  increase 
in  the  quantity  of  labour  performed  by  man  within  a given 
time  tends  to  be  accompanied  by  some  deterioration  in  its 
quality.  But  in  the  present  state  of  our  knowledge  it  is  not 
possible,  I conceive,  to  establish  even  an  approximate  numerical 
law  connecting  the  deterioration  in  quality  with  the  increase 
in  quantity ; and  the  relation  between  them  would  certainly 
vary  considerably  in  the  case  of  different  kinds  of  labour. 

§ 3.  Here,  however,  it  should  be  observed  that  it  is  not  the 
proportion  of  labour  to  the  population  supported  by  it  that 
recent  economists  have  usually  considered,  in  investigating  what 
they  call  the  “ Law  of  the  increase  of  Labour  ” ; but  rather  the 
increase  in  the  total  number  of  human  beings  in  any  country. 
“ The  increase  of  labour,”  says  Mill,  “ is  the  increase  of  man- 
“ kind ; of  population.”  Still  it  seems  clear  that  the  determina- 
tion of  the  rate  of  increase  in  the  numbers  of  a nation  does  not 
come  primd  facie  within  the  general  problem  of  Production  as 
I,  after  Adam  Smith,  have  stated  it;  for,  as  was  said,  we  do 
not  consider  that  a nation  is  richer  or  “ better  supplied  with 
“ the  necessaries  and  conveniences  of  life,”  because  having 
more  members  to  feed  and  clothe  it  produces  proportionately 
more  food  and  clothing.  It  is,  therefore,  not  primarily  because 
the  increase  of  a nation’s  numbers  involves  an  increase  in  the 
quantity  of  its  labour,  that  we  are  here  called  upon  to  deal 
with  the  large  controversy  raised  by  Malthus’s  famous  Essay 

10—2 


148 


POLITICAL  ECONOMY 


BOOK  I 


on  Population  ; but  because  of  the  relation  which  the  Malthusian 
doctrine  maintained  between  increase  of  numbers  in  a given 
country  and  decrease  in  the  proportional  productiveness  of  the 
correspondingly  increased  labour.  Or  to  use  the  phrases  that 
have  now  become  familiar,  the  “ Law  of  Population  ” chiefly 
interests  us  because  it  involves  the  “ Law  of  Diminishing 
“ Returns.” 

But  the  connexion  of  these  two  questions  is  so  intimate  that 
it  seems  desirable  here  to  sum  up  briefly  the  results  of  the  long 
discu-ssion  started  by  Malthus’s  essay  ; especially  as  it  is  not, 
I think,  difficult  at  the  present  stage  of  the  discussion  to  state 
these  results,  so  far  as  they  are  important  for  our  present 
purposes,  in  a form  not  open  to  attack. 

It  is  now  generally  admitted  by  competent  judges  that  the 
human  race — normally,  if  not  ahvays  and  everywhere — has  been 
to  a great  extent  kept  down  to  its  actual  numbers  by  the  ditfi- 
cidty  of  STipplying  the  physical  wants  of  the  population  that, 
but  for  this  difficulty,  would  have  existed.  This  check  to 
population  has  operated  in  the  different  w'ays,  which  Malthus 
distinguished  as  “ preventive  ” and  “ jjositive  ” : that  is,  either 
(1)  by  the  fear  of  an  insufficient  supjfly  of  the  material  means 
of  existence,  causing  abstinence  from  marriage,  with  or  without 
vice,  or  artificial  limitation  of  families,  generally  more  or  less 
vicious* ; or  (2)  by  the  actual  effect  the  insufficient  supply  in 
^causing  the  destruction  of  life;  whether  (o)  through  simple 
starvation,  or  voluntary  exposure  of  children,  or  wars  due  to 
economic  causes  and  constituting  a mode  of  the  struggle  for 
sustenance  among  different  parts  of  the  human  race;  or  (6) 
through  diseases  caused  or  aggravated  by  want  of  nourishment, 
or  neglect  of  children  or  unhealthy  manners  (fl‘  life  caused  by 
the  necessity  of  earning  a livelihood, — which  are  the  positive 
checks  chiefly  operative  in  modern  civilised  societies^ 

' The  practice  of  abortion  may  be  classed  with  “preventive'’  or  “positive” 
checks  according  to  the  view  taken  of  the  point  at  which  human  life  begins. 

- Malthus  {Pri)iriple  of  PopiiUitinn,  I.  c.  2)  includes,  in  his  account  of  both 
“preventive”  and  “positive”  checks,  “vice  and  misery”  not  due  to  want  of 
food : and  this  is  doubtless  legitimate  when  the  question  of  population  is 
considered  in  reference  to  the  possibilities  of  social  improvement  imagined  by 
optimistic  writers  such  as  Godwin.  But  in  analysing  the  forces  which  keep 
population  to  its  actual  numbers  it  seems  important  to  distinguish  the  vice  and 
misery  which  are  ultimately  due  to  the  difficulty  of  satisfying  physical  wants, 


CHAP.  VI 


LAWS  OF  PRODUCTION 


149 


Accordingly,  in  a certain  very  important  sense,  it  may  be 
affirmed  that  “ population  has  a constant  tendency  to  increase 
“ beyond  the  means  of  subsistence  ” ; provided  that  we  under- 
stand by  the  word  “ tendency  ” that  the  proposition  relates  to 
what  would  happen,  if  the  checks  in  question  were  removed, 
not  to  what  may  be  expected  to  happen  in  the  actual  future  of 
our  own  or  any  other  community.  The  proposition,  though 
abstract  and  h>’pothetical,  is  not,  of  course,  demonstrable  d 
priori ; it  rests  on  inductive  evidence : but  such  evidence  has 
been  adequately  provided,  so  far  at  least  as  concerns  large 
portions  of  the  human  race ; and  it  has  been  provided  with 
special  definiteness  in  respect  of  the  English  race,  while  living 
in  countries  of  the  temperate  zone  under  existing  social  con- 
ditions. 

As  regards  this  portion  of  the  human  race — to  which  I 
shall  for  the  present  confine  my  attention — we  may  state  what 
is  substantially  the  Malthusian  doctrine  with  somewhat  more 
quantitative  precision.  Suppose  that  all  Englishmen  married 
at  the  time  of  life  at  which,  apart  from  prudential  restraint, 
they  were  inclined  to  do  so  and  observed  the  rules  of  chastity 
and  monogamy  to  the  extent  that  experience  would  justify  us 
in  expecting ; that  they  did  not  artificially  limit  the  number  of 
their  families ; could  obtain  without  seriously  unhealthy  toil 
the  amount  of  food,  clothing,  fuel,  and  house-room  required  for 
health ; had  the  amount  of  protection  from  death  and  bodily 
injury  which  is  actually  afforded  by  the  Governments  of  civilised 
Europe  in  time  of  peace ; and  took  such  measures  to  ward  off 
preventable  diseases,  from  themselves  and  their  children,  as 
ordinarily  careful  persons  would  take  in  the  present  state  of 
medical  knowledge.  We  may,  I think,  safely  affirm  that  — 
apart  from  exceptional  calamities — the  population  would  double 
itself  within  a period  less  than  30  years'. 


from  such  vice  and  misery  as  mere  economic  improvement  would  have  no 
tendency  to  remove. 

1 There  are  serious  difficulties  in  the  way  of  determining  exactly  this 
hypothetical  period  of  duplication.  The  most  important  evidence  is  that 
supplied  by  the  growth  of  the  population  in  the  United  States, — where  the 
increase,  between  1790  and  1840,  was  from  3 9 to  17'1  millions,  in  a period 
in  which  the  immigration  was  proportionally  small.  But  even  in  this  case 
it  is  difficult  to  estimate  exactly  the  effect  of  immigration,  on  the  one  hand, 
and,  on  the  other  hand,  we  can  only  guess  roughly  the  extent  to  which 


150 


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Secondly,  it  may  be  affirmed  that  if  the  process  of  doubling 
and  re-doubling  of  the  population  were  continued,  upon  any 
given  portion  of  the  earth’s  surface,  the  means  of  subsistence 
obtainable  from  the  region  in  question  would  within  a certain 
time  become  barely  sufficient  to  support  the  population ; so 
that  the  supposed  increase  could  no  longer  continue, — the  time 
at  which  this  stoppage  would  be  reached  varjung,  of  course, 
with  the  density  of  the  population*. 

Thirdly,  we  may  affirm  that  our  past  experience  of  the 
growth  of  the  industrial  arts  affords  no  justification  for  the 
assumption  that  the  future  development  of  agriculture  will 
enable  us  to  increase  food  in  a ratio  at  all  corresponding 
to  the  supposed  increase  of  population. 

It  is  in  examining  the  nature  of  the  ultimate  barrier  to 
increase  of  population,  affirmed  in  the  second  of  the  propositions 
above  given,  that  we  come  upon  what  has  been  called  the  Law 
of  Diminishing  Returns.  Before  discussing  this,  it  should  be 
observed  that  the  greater  rapidity  in  the  increase  of  population 
which  we  have  supposed  would  involve  necessarily  a smaller 
proportion  of  workers  to  non-workers.  Assuming,  however,  that 
the  arts  of  industry’  were  sufficiently  developed  to  enable  this 
smaller  proportion,  duly  aided  by  instruments,  to  provide  ade- 
quate nourishment,  clothing,  &c.,  for  the  whole  population,  and 
that  no  greater  proportion  of  the  produce  of  labour  took  the 
form  of  luxuries ; it  is  evident  that  if  the  productiveness  of 
labour  did  not  diminish,  the  increase  of  population  might  go 
on  until  it  was  checked  by  non-preventable  diseases  due  to 
over-crowding.  The  “ Law  of  Diminishing  Retunis,”  then,  af- 
firms that  the  productiveness  of  labour  does  tend  to  diminish, 
as  the  proportion  of  labourers  to  land  increases,  after  a certain 
degree  of  density  of  popidation — much  below  what  would  be  on 
other  grounds  insanitary — has  been  reached.  The  degree  of 
density,  it  should  be  observed,  varies  with  the  development  of 


“misery”  or  “vice”  or  prudence  actually  diminished  the  population  even  of 
this  exceptionally  prosperous  community.  Accordingly  in  the  numerical  esti- 
mate given  in  the  text  I have  allowed  a large  margin  beyond  the  2.5  years 
which  Malthus  gave  as  the  time  required  for  population  to  double  itself,  when 
unchecked. 

1 For  simplicity’s  sake  I have  supposed  foreign  trade  to  be  excluded — a 
legitimate  supposition,  as  we  may  take  the  district  of  any  size  and  any  density 
of  population. 


CHAP.  VI 


LAWS  OF  PRODUCTION 


151 


the  industrial  arts,  and  the  accumulation  of  capital ; and  it  tends 
to  be  continually  advanced  by  the  progress  of  invention,  provided 
that,  through  the  accumulation  of  capital,  the  improvement  of 
processes  which  invention  renders  possible  is  actually  realised. 
The  necessity — to  which  Carey  drew  attention^ — of  thus,  limit- 
ing the  scope  of  the  law  of  diminishing  returns  to  communities 
of  a certain  density  is  now  generally  recognised.  In  fact,  in  a 
thinly-peopled  country  we  have  to  note  a tendency  to  increasing 
returns ; every  additional  labourer  tends  to  make  labour  on  the 
average  more  productive,  since  he  enables  the  whole  body  of 
labourers  to  realise  more  fully  the  advantages  of  co-operation. 
And  this  tendency  to  increasing  returns  continues  to  ojierate,  in 
all  branches  of  industry  except  agriculture  and  mining,  without 
any  knovui  limit  from  density  of  population,  except  such  as 
arises  from  sanitary  considerations.  The  closer  human  beings 
live  to  one  another,  the  greater  tends  to  be  the  quantum  of 
utility  derived  from  a given  quantum  of  labour  in  conveyance 
and  communication ; the  greater,  therefore,  tends  to  be  the 
development  of  co-operation  by  exchange ; and  as  the  scale  on 
which  each  particular  branch  of  manufircture  may  be  profitably 
organised  becomes  thus  proportionally  larger,  the  production 
itself  tends  correspondingly  to  become  more  economical,  as  has 
been  already  explained 

Hence  the  Law  of  Diminishing  Returns  may  be  understood 
both  in  a narrower  and  in  a wider  signification ; and  there  is 
some  danger  of  confounding  the  two.  It  may  either  mean 

(1)  that  the  productiveness  of  agricultural  and  extractive  labour 
tends,  ceteris  paribus,  to  diminish  with  every  increase  of 
population,  even  though  capital  increases  proportionally ; or 

(2)  that,  notwithstanding  increased  returns  from  the  labour 
employed  in  manufactures  and  internal  trade,  the  productive- 
ness of  labour  generally  tends  .so  to  diminish : — the  degree  of 
density  at  which  the  former  tendency  would  begin  to  operate 
being  of  course  lower  than  that  which  would  introduce  the 
latter. 

That  the  application  of  labour  in  agriculture  is  subject,  in  a 
certain  sense,  to  the  condition  of  Diminishing  Returns  may  be 
considered  to  be  an  established  doctrine : that  is  to  say,  it  is 

’ Principles  o f Social  Science,  vol.  I.  c.  iv. 

“ Cf.  ante  c.  iv.  § 6. 


152 


POLITICAL  ECONOMY 


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universally  admitted  by  competent  persons  that,  in  a countr}-  in 
which  population  has  reached  a certain  point  of  density,  the 
agricultural  produce  needed  is  obtained  partly  by  processes 
more  costly  than  would  be  required  if  the  total  amount  needed 
were  less.  According  to  the  view  of  most  economists  since 
Ricardo,  these  processes  are  of  two  kinds:  either  (1)  the  ap- 
plication of  labour  and  capital  to  land  of  inferior  quality  or 
situation;  or  (2)  the  application  to  the  best  land  of  labour  and 
capital  in  excess  of  the  amount  which  yields  the  greatest  pro- 
portional return.  It  is,  however,  held  by  a suggestive  writer — 
Mr  Simon  W.  Patten  {Premisses  of  Political  Economy,  c.  vi.) — 
that  there  is  not  really  room  in  agriculture  for  the  second  kind 
of  process ; that  the  proportional  return  to  well-applied  agri- 
cultural labour  increases  up  to  the  point  at  which  no  additional 
return  at  all  could  be  obtained  by  any  amount  of  additional 
labour ; that,  therefore,  we  ought  to  speak  of  a “ law  of  limited 
“ returas  ” instead  of  a “ law  of  diminishing  returns  ” — so  far  as 
we  have  in  view  the  returns  from  any  given  piece  of  land. 

Now  such  an  abrupt  breach  of  continuity  in  the  relation  of 
labour  to  resultant  utility  as  Mr  Patten’s  argument  assumes  is 
contrary  to  our  general  experience  of  the  application  of  human 
labour  for  the  satisfaction  of  human  wants : and  nothing  that 
I have  been  able  to  learn  of  the  actual  condition  of  agriculture 
seems  to  give  adequate  ground  for  assuming  it  to  occur  in  this 
case.  I think,  however,  that  in  the  “ intensive  ” cultivation  of 
certain  kinds  of  produce  there  is  probably  but  a small  interval 
between  the  point  at  which  an  additional  increment  of  labour 
or.  capital  certainly  ceases  to  give  a proportional  increase  and 
the  point  at  which  it  would  cease  to  give  any  material  increase 
at  all : so  that  the  capital  earning  diminished  returns  may 
sometimes  be  confined  within  limits  so  narrow  that  its  exist- 
ence cannot,  in  the  present  state  of  the  art  of  agriculture,  be 
clearly  established  by  the  agreement  of  experts.  It  appears,  for 
instance,  in  the  case  of  wheat,  that,  in  the  judgment  of  some 
competent  farmers,  the  outlay  required  on  an  English  farm  to 
produce  wheat  in  the  most  profitable  manner — even  at  the 
lowest  price  at  which  it  would  be  remunerative  to  produce  it 
at  all — would,  on  the  average,  give  a crop  of  wheat  which  could 
not  be  confidently  expected  to  be  much  increased  by  any  addi- 
tional outlay  likely  to  be  remunerative  at  any  price  -ndthin  the 


CHAP.  VI 


LAWS  OF  PRODUCTION 


153 


limits  of  probability.  It  may,  indeed,  be  regarded  as  certain 
that  any  considerable  rise  in  the  demand  for  wheat  would  ceteris 
paribus  lead  to  a considerable  increase  of  outlay  on  land  pre- 
viously wheat-growing;  but  the  change  would  chiefly  affect 
what  we  may  call  the  doubtful  margin  of  expenditure : — e.g., 
more  manure  would  be  applied  than  was  actually  applied  be- 
fore, but  not  more  than  some  competent  judges  would  have 
considered  economical,  even  at  the  lower  price.  Probably,  how- 
ever, any  important  increase  in  the  capital  applied  to  wheat- 
growing on  the  same  land  would  involve  an  increase  in  the 
number  of  crops  obtained  within  a given  term  of  years ; the 
four-crop  rotation  would  be  changed  to  a five-crop  rotation 
with  three  corn-crops,  or  corn-crops  might  even  be  grown  con- 
tinuously for  several  years — on  Mr  Lawes’  method — with  only 
occasional  changes  of  clover  or  roots.  But  even  in  this  last  case 
it  would,  I suppose,  be  difficult  to  say — in  view  of  Mr  Lawes’ 
results — that  the  extra  capital  thus  applied  would  certainly 
yield  diminished  returns. 

Even  in  its  wider  application  to  the  productiveness  of  labour 
generally,  the  operation  of  the  tendency  to  diminishing  returns 
in  England  at  the  present  time  may  be  legitimately  inferred 
from  the  decidedly  greater  productiveness  of  labour  and  capital, 
when  applied  in  the  countries  to  which  Englishmen  have 
migrated,  as  manifested  in  the  larger  remuneration  of  similar 
labour,  and  the  higher  interest  on  capital,  in  these  countries  as 
compared  with  Great  Britain'.  We  may,  therefore,  assume  that 

' These  differences  of  course  vary  from  place  to  place  and  are  continually 
fluctuating ; but  as  to  their  general  nature  there  is  not,  I conceive,  any  dispute. 
The  case  is  less  easy  to  establish  as  regards  interest  than  as  regards  wages, 
because  capital  is  so  easily  transferred  from  England  to  (say)  the  United  States, 
that  the  extra  interest  obtainable  from  American  investments  must  be  taken  to 
represent  extra  risk  in  such  investments  for  Englishmen,  as  estimated  by 
English  investors  generally.  But  in  certain  investments  it  is  evident  that  this 
extra  risk  arises  largely  from  the  additional  difficulty  that  a foreigner  has  in 
ascertaining  and  guarding  against  the  dangers  that  may  from  time  to  time 
threaten  them;  so  that  in  such  investments — e.y.,  in  mortgage  on  real  estate — 
there  can  be  no  doubt  that  interest  in  the  United  States  is  much  higher  to 
residents  than  interest  in  England  to  Englishmen  ; after  making  all  allowance 
for  risk. 

There  is  to  be  set  on  the  other  side  the  greater  proportion  of  produce 
allotted  as  rent  in  England : hut  from  this,  again,  we  must  subtract  what  is 
really,  from  a social  point  of  view,  interest  on  capital,  being  paid  for  the  use 
of  the  results  of  past  labour : and  what  remains — though  it  cannot  be  exactly 


154 


POLITICAL  ECONOMY 


BOOK  I 


the  gi’f)\vth  of  our  population  has  passed  the  point  at  which  the 
average  efficiency  of  labour  tends  to  be  decreased  by  any 
addition  to  its  quantity,  other  things  remaining  the  same, 
even  though  capital  has  been  accumulated  to  a proportional 
extent'. 

But  then  as  other  things  do  not  remain  the  same,  as  on  the 
contrary  the  improvement  in  the  arts  of  industry — including 
improvement  in  the  system  of  co-02Deration  through  exchange 
with  less  densely  peopled  countries — is  continually  going  on,  a 
tendency  of  growing  popidation  to  decrease  proportional  produce 
in  England  is  continually  counteracted  by  the  tendency  of 
industrial  progress  to  increase  it ; and  our  evidence  does  not 
enable  us  to  lay  down  any  concrete  law,  formulating  the  actual 
influence  which  the  two  forces  combined  may  be  expected  to 
exercise  in  determining  the  average  pi’oduce  per  head  for  a 
given  density  of  population.  If  indeed  we  excluded  Foreign 
Trade,  we  might  confidently  affirm  that  no  degree  of  improve- 
ment in  industry  known  to  us  by  experience  could  counteract 
the  effect  in  decreasing  the  average  productiveness  of  labour 
which  the  actual  rate  of  increase  of  population  in  England 
would  cause ; so  that  the  decrease  in  average  supply  must  soon 
check  the  rate  of  increase.  But  then  this  exclusion  of  Foreign 
Trade  makes  such  an  affirmation  purely  abstract  and  h^-po- 
thetical.  Supposing  Foreign  Trade  to  go  on,  we  have  to  decide 
whether  the  region  whose  production  we  are  examining  is  to 
include  all  the  mutually  trading  countries  or  only  one.  But 
on  neither  view  can  we  frame  any  definite  concrete  “ law  of 

estimated — can  only  be  a very  small  percentage  of  the  aggregate  earnings  of 
Englishmen. 

- It  is  not  of  course  meant  that  there  is  no  possible  application  of  labour 
and  capital  in  England,  according  to  the  methods  of  industrj'  at  present 
understood,  which  would  be  more  productive  than  some  applications  at  present 
made.  Such  a statement  would  be  absurd ; as  there  is  a good  deal  of  capital 
actually  employed  which  is  yielding  no  return  at  all.  What  is  meant  is  that, 
ceteris  paribus,  any  considerable  increment  of  capital-aided  labour,  applied  with 
average  skill,  would  be  less  productive  than  the  average  of  such  labour  actually 
applied.  It  should  be  observed  that  agricultural  labour  is  sometimes  liable  to 
become  more  unproductive,  in  consequence  not  merely  of  the  increase  of 
population,  but  of  a disproportionate  employment  of  the  additional  labour  in 
agriculture:  c.g.,  through  an  excessive  subdivision  of  farms.  But  in  this  case 
the  loss  in  productive  efficiency  is  not  entirely  due  to  the  law  of  diminishing 
returns;  but  partly  to  the  defect  of  an  industrial  organisation  too  inert  to 
respond  adequately  to  a change  in  its  circumstances. 


CHAP.  VI 


LAWS  OF  PRODUCTION 


155 


“ diminishing  returns,”  applicable  to  a country  like  England  ; on 
the  former  view,  because  the  population  of  the  whole  region 
with  which  England  trades  cannot  be  said  to  have  reached  the 
point  at  which  returns  diminish ; on  the  latter  view,  because 
the  possibilities  of  England’s  obtaining  additional  subsistence 
by  trade  have  only  a remote  and  indefinite  limit.  If  the  dream 
of  Free-Traders  were  realised,  if  all  the  world  were  willing  to 
allow  free  ingress  to  our  manufactures,  it  seems  to  be  quite 
possible  that  the  whole  of  England  might  become  almost  as 
thickly  populated  as  Middlesex,  without  any  decrease  in  the 
average  productiveness  of  her  labour. 

So  far,  therefore,  as  we  go  beyond  the  abstract  proposition 
that  the  proportional  returns  to  capital  and  labour  in  England 
tend  ceteris  paribus  to  be  decreased  by  any  increase  of 
population,  we  can  only  infer  from  the  evidence  before  men- 
tioned that  actually  the  proportional  returns  to  capital  and 
labour  in  England  are  less  than  they  would  be  if  England  were 
less  densely  populated.  Let  us  now  return  to  the  more  strictly 
“ Malthusian”  law  which  affirms  that  the  population  of  countries 
like  England  would  increase  at  a decidedly  more  rapid  rate 
than  the  present,  were  it  not  for  the  operation  of  either  the 
prudential  or  the  positive  checks.  This  statement,  as  I have 
said,  is  hardly  now  disputed  by  competent  persons ; but  there 
is  an  ambiguity  in  the  phrase  “ prudential  restraint  ” which 
it  is  important  to  point  out.  Prudence,  in  this  application, 
means  the  foresight  and  consequent  avoidance  of  danger ; 
but  Malthus’s  disciples  have  not  always  made  it  clear  whether 
the  danger  to  which  they  referred  was  the  danger  of  being 
in  want  of  the  necessaries  of  life  (for  oneself  or  one’s  children), 
or  the  danger  of  being  in  want  of  comforts,  decencies,  or 
luxuriesh  It  is  obvious  that  the  motive  which  actually  re- 
strains all  classes  in  the  community  above  the  lowest  is  fear 
of  the  latter,  not  the  former  danger.  It  is  necessary  to  premise 
this  before  considering  the  concrete  law  which  some  writers 
have  preferred  to  give  as  the  main  Malthusian  doctrine : the 
proposition,  namely,  that  “ population  presses  closely  on  the 
“ limits  of  subsistence.”  In  a certain  very  important  sense  this 

1 Malthas  himself  expressly  distinguished  these  different  applications  of 
prudence  at  the  outset  of  his  Essay ; but  I am  not  sure  that  he  always  kept 
the  distinction  sufficiently  before  his  mind. 


156 


POLITICAL  ECONOMY 


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proposition  is  generally  true  and  generally  admitted  in  respect 
of  civilised  and  fully-jjeopled  countries ; in  the  sense,  namely, 
that  population  increases  when  the  means  of  subsistence  in- 
crease in  such  a way  as  will  enable  the  mass  of  the  community 
to  obtain  an  ampler  supply  of  necessaries.  From  this,  however, 
it  cannot  be  absolutely  inferred,  that  even  the  lowest  class  in 
the  community  is  on  the  verge  of  starvation ; it  may  be  merely 
that  they  are  in  a position  in  which  the  supply  of  necessaries  is 
an  important  element  in  the  consideration  whether  or  not  it  is 
prudent  to  marry.  Still,  it  may  be  stated  as  a concrete  law  that 
holds  good  in  England  and  other  European  countries,  that  there 
is  a compression  exercised  on  jJopulation  by  the  ditficulty  of 
procuring  the  necessaries  of  life.  The  compression  is  not  rigid : 
in  England,  for  example,  population  might  easily  increase 
with  greater  rapidity  than  at  pre.sent,  if  all  classes  restricted 
their  consumption  of  luxuries — especially  harmful  luxuries:  but 
a strong  elastic  pressui’e  undoubtedly  exists.  If  any  statesman 
or  philanthropist  cherished  the  somewhat  old-fashioned  aim  of 
increasing  the  population  of  his  country,  the  best  course  he 
could  adopt  would  be  to  pi'omote  the  increase  of  its  means  of 
subsistence^  especially  of  the  mass  of  the  population;  since, 
though  this  is  not  the  only  means  by  which  population  can  be 
increased,  it  is  a means  that  may  be  relied  on  as  effectual ; and 

* The  term  “increase  of  the  means  of  subsistence”  is  not  free  from  ambiguity; 
for  instance,  the  question  may  be  raised  whether  a nation  really  increases  its 
means  of  subsistence  if  a portion  of  it  adopts  a cheaper  instead  of  a more 
expensive  food,  supposing  that  the  former  is  abundant  in  proportion  to  its 
cheapness.  I conceive  that  if  the  cheaper  food  be  equally  adapted  to  support 
life, — or  even  if  it  be  merelj'  more  adapted  in  proportion  to  its  cost, — the  nation 
must  be  regarded  as  having  more  command  over  the  means  of  subsistence;  and 
that  the  change  constitutes  a distinct  gain  in  utility.  And  I think  that 
economists  who  have  taken  the  opposite  view  have  too  hastily  assumed  the 
proposition  combated  in  the  next  paragraph;  namely,  that  the  classes  consuming 
the  cheaper  food  would  necessarily  “people  down”  to  the  thus  lowered  limit  of 
subsistence.  Even  if  this  consequence  followed  it  would  not  necessarily  involve 
any  suffering,  though  it  would  undoubtedly  increase  the  danger  of  suffering 
from  any  accidental  diminution  of  income;  because  if  they  had  continued  to 
consume  the  dearer  food  they  would  under  certain  circumstances  have  had  the 
resource — which  they  have  now  lost — of  descending  to  the  cheaper  article.  But, 
as  I urge  in  the  next  paragraph,  there  is  no  necessity  to  suppose  that  the  con- 
sumers of  the  cheaper  food  cannot  raise  their  standard  of  living;  and  if  they 
do  this,  they  will  not  only  have  more  present  command  over  the  conveniences 
of  life,  but  also — on  the  whole — more  security  as  regards  the  future,  than  they 
would  otherwise  have  had. 


CHAP.  VI 


LAWS  OF  PRODUCTIOX 


157 


it  is  the  only  means  that  can  be  adopted  without  bringing  the 
population  nearer  to  the  danger  of  the  varied  sufferings  entailed 
by  insufficiency  of  food. 

But  it  is  one  thing  to  affirm  that  if  subsistence  increased, 
population  would  increase  also ; it  is  quite  a different  thing  to 
maintain  that  the  latter  increase  would  in  all  cases  be  sufficient 
to  absorb  the  former.  That  this  effect  would  be  produced  in  the 
state  of  society  of  which  he  had  actual  experience  Malthus 
certainly  held ; and  a similar  assumption  is  the  foundation  of 
the  doctrine  of  a “ natural  rate  of  wages  ” which  occupies  a 
cardinal  position  in  Ricardo’s  theory  of  distribution  ; and  to 
which  attention  has  been  attracted  by  Lassalle  and  other 
German  Socialists,  under  the  ominous  name  of  the  “ iron  law  of 
“ wages  ”b  Ricardo  does  not  indeed  fall  into  the  error  of  sup- 
posing— as  Lassalle  and  others  appear  to  have  understood — that 
the  “ natural  rate  ” of  wages  is  that  which  gives  the  labourer 
only  the  bare  necessaries  of  life ; though  he  sometimes  in- 
cautiously uses  language  that  suggests  this  meaning,  as  when 
he  says  that  “ the  natural  price  of  labour  is  that  price  which  is 
necessary  to  enable  the  labourers,  one  with  another,  to  subsist 
“and  to  perpetuate  their  race”'l  Elsewhere  he  repeatedly  re- 
cognises that  the  natural  price  of  labour  “ essentially  depends 
“ on  the  habits  and  customs  of  the  people,”  or  “ the  quantity 
“of  food,  necessaries,  and  conveniences  become  essential  to  them 
“ from  habit  ” ; adding  that  “ many  of  the  conveniences  now 
“ enjoyed  in  an  English  cottage  would  have  been  thought 
“ luxuries  at  an  earlier  period  of  our  history.”  This  last  sen- 
tence shews  further  that  he  did  not  regard  the  natural  price 
of  labour,  estimated  in  commodities,  as  a constant  quantity. 
On  the  contrary  he  is  careful  to  state  that  “it  varies  at  different 
“ times  in  the  same  country  ” ; and  he  speaks  of  the  effort  to 
raise  it,  by  “ stimulating  the  taste  of  the  labouring  classes  for 
“comforts  and  enjoyments,”  as  one  of  the  worthiest  aims  of 
philanthropy.  But  he  did,  I think,  assume  that  a mere  increase 
of  subsistence  had  in  itself  no  tendency  to  produce  this  effect ; 
that,  even  though  the  “ market  rate  of  wages  ” were  to  “ remain 
“ for  an  indefinite  period  above  the  natural  rate,” — which  he 

’ “Ehernes  (brazen)  Lohngesetz.” 

^ This  passage  and  those  afterwards  quoted  are  all  taken  from  the  same- 
Chapter  (v.)  of  Ricardo’s  Principles  of  Political  Economy. 


158 


POLITICAL  ECONOMY 


BOOK  I 


expressly  states  to  be  possible, — the  latter  would  still  during 
this  period  have  no  tendency  to  rise  towards  the  former.  At 
any  rate  this  assumption  seems  to  be  involved  in  the  main  part 
of  his  reasonings  on  wages : it  is,  however,  opposed  to  what  our 
general  knowledge  of  human  nature  would  lead  us  to  infer: 
and,  so  far  as  I know,  a duly  comprehensive  study  of  economic 
facts  does  not  tend  to  support  itb  I conceive,  indeed,  that 
in  the  actual  restriction  of  the  numbers  of  English  manual 
labourers  “ positive  ” checks  have,  for  the  most  part,  operated 
more  strongly  than  “ preventive  But  so  far  as  any  class 
of  labourers  is  restrained  preventively,  by  a “ standard  of 
“ comfort,”  from  increasing  its  numbers,  I see  no  reason  to 
doubt  that  such  a standard  will  tend  to  be  somewhat  raised, 
if  any  increase  in  the  productiveness  of  the  labour  in  question 
should  cause  a material  and  long  sustained  increase  in  its  re- 
muneration. 

I 4.  We  thus  arrive  at  the  question  which  remains  to  be 
discussed,  in  order  to  complete  the  inquir}*  proposed  for  the 
present  chapter ; namely,  whether  we  can  deteraiine  the  laws  of 
variation  in  the  productive  efficiency  of  labour.  So  far  as  the 
personal  efficiency  of  the  labourers  is  concerned,  no  economist 
(I  believe)  has  ever  claimed  to  possess  the  knowledge  required  for 
this  task.  Indeed  it  seems  evident  that  any  one  who  attempted 
to  explain  the  differences  in  the  physical,  intellectual,  and  moral 
qualities  of  labourers,  and  in  the  motives  presented  to  them  by 
their  social  and  industrial  circumstances,  sufficiently  to  enable 

^ It  was  the  opinion  of  Malthus  {Principles  of  Political  Economy,  c.  iv.  § 2) 
that  a “ decided  elevation  in  the  standard  of  the  comforts  and  conveniences 
“of  the  English  working  classes”  had  been  caused  by  the  unusual  succession 
of  fine  harvests  in  the  fifty  years  from  1715  to  1765. 

- That  prudential  motives,  however,  do  operate  to  an  important  extent,  even 
in  this  part  of  our  population,  may  be  legitimate!}’  inferred  from  the  fluctuations 
in  the  marriage-rate,  which  Dr  Farr  has  called  the  “ barometer  of  national 
“prosperity”:  and  which  in  England  varied  between  17’9  per  1000  persons 
in  1853,  when  industry  was  feeling  the  full  stimulus  of  the  Australian  gold- 
discoveries,  to  14’4  in  1879,  a year  in  which  a prolonged  commercial  depression 
reached  its  lowest  point.  See  Vital  Statistics,  (from  the  writings  of)  William 
Farr,  Part  II.  pp.  74,  75. 

By  “positive”  checks  I mean,  chiefly,  not  actual  starvation  but  (1)  increased 
mortality  of  adults  from  diseases  caused  or  aggravated  by  insufficient  supply  of 
necessaries,  (2)  mortality  of  children  from  this  cause  or  from  parental  neglect 
due  to  the  necessities  of  breadwinning,  and  (3)  premature  deaths  from  unhealthy 
or  dangerous  occupations. 


CHAP.  VI 


LAWS  OF  PRODUCTION 


159 


us  to  predict  even  roughly  the  future  operation  of  these  condi- 
tions, must  in  fact  claim  a prescience  of  the  whole  development 
of  civilised  society,  beyond  the  pretensions  of  the  most  confident 
of  living  sociologists.  While,  again,  the  ultimate  causes  of 
these  differences  are  so  complicated  and  their  effects  so  inter- 
mingled, that  it  seems  rash  even  to  attempt  any  precise  state- 
ment as  to  the  effect  that  any  particulai’  change  would  produce 
if  isolated.  Whether  we  consider,  for  example,  changes  in  the 
labourers’  habits  of  diet,  or  changes  in  the  educational  machinery 
applied  to  them,  or  in  their  social  customs  and  ojjinions,  or  the 
terms  on  which  they  usually  co-operate,— though  we  can  often 
pronounce  with  confidence  on  the  kind  of  effect  on  production 
to  be  expected  from  a given  cause, — we  can  hardly  ever  predict, 
even  hypothetically,  the  quantity  of  effect. 

It  remains  to  consider  how  far  the  case  is  different  with 
that  element  in  the  productiveness  of  labour  which  depends  on 
the  aid  afforded  ‘it  by  capital ; whether  we  can  determine  the 
“ law  of  the  increase  of  capital.”  I must  first  remark  that 
Mill  and  others  who  have  dealt  with  this  question  appear  to 
me  to  present  a somewhat  one-sided  view  of  the  process  of 
accumulation  of  what  I have  called  “concrete  capital,”  i.e.,  instru- 
ments and  other  intermediate  results  of  labour  employed  for 
remote  ends.  It  is  right  to  dwell  on  the  fact  that — at  least  in 
civilised  communities  as  organised — this  accumulation  actually 
depends,  in  the  main,  on  saving,  that  is,  on  voluntary  delay  in 
consumption,  on  the  part  of  individuals : but  it  should  also  be 
pointed  out  that  this  saving  can  take  effect  in  aiding  pro- 
duction only  so  far  as  instruments  or  processes  have  been  dis- 
covered by  which  labour  may  be  made  more  productive,  through 
delay,  in  its  final  result  of  consumable  commodities.  Or,  to 
use  a current  phrase,  there  must  be  a “ field  for  the  employ- 
“ ment  of  capital  ” if  profit  is  to  be  gained ; and  the  existence 
and  continual  enlargement  of  this  field  depend  on  invention 
— in  the  extended  sense  in  which  I have  before  used  the  term 
to  include  all  improvements  in  the  general  organisation  of  in- 
dustry, as  well  as  in  special  industrial  processes. 

Now  I conceive  that  no  important  quantitative  generalisa- 
tions can  be  established  as  to  the  variations  in  this  second  factor 
of  the  growth  of  social  capital.  We  have  no  means  of  pre- 
dicting the  rate  at  which  either  our  knowledge  of  the  laws  of 


160 


POLITICAL  ECONOMY 


BOOK  I 


nature  or.  the  application  of  this  knowledge  to  industry  is  likely 
to  progress  in  the  future ; it  may  be  very  much  more  rapid  and 
extensive  than  it  has  been  even  during  the  last  hundred  years ; 
on  the  other  hand,  it  may  be  very  much  slower,  or  may  even 
come  almost  to  a standstill — putting  out  of  sight  the  possibility 
of  any  such  social  disturbances  as  might  lead  to  an  actual  retro- 
gression in  civilisation.  And  it  is  further  to  be  observed  that 
even  if  we  could  predict  roughly  the  amount  of  improvement 
which  the  industry  of  the  future  may  be  expected  to  receive 
from  invention,  it  would  still  be  uncertain  how  far  this  im- 
provement will  involve  the  enlargement  of  the  field  of  em- 
ployment for  capital.  Hitherto,  inventions  have  generally  had 
the  effect  of  complicating  and  prolonging  the  processes  of 
industry,  while  at  the  same  time  increasing  the  ultimate  pro- 
ductiveness of  labour.  But  this  has  not  always  been  the  case ; 
and  so  far  as  I know,  there  is  no  definite  reason  why  the 
inventions  of  the  future  should  not  be  chiefly  in  the  direction 
of  simplifying  and  abbreviating  industrial  processes;  so  that 
at  each  step  of  improvement  the  demand  for  capital  will  be 
restricted  instead  of  being  enlarged. 

Bearing  this  in  mind,  let  us  consider  whether  we  can 
iiscertain  the  abstract  law  of  the  other  factor  in  the  growth  of 
concrete  capital ; whether,  sup^josing  the  field  of  employment 
fin'  capital  determinefl,  we  can  say  how  far  the  capital  will  be 
furnished.  Now  the  applications  of  labour,  in  the  making  of 
instruments  or  otherwise,  by  which  its  ultimate  net  production 
is  increased,  are  of  var^’ing  degrees  of  profitableness ; the 
increment  of  produce  obtained  by  delay  is  in  some  cases  greater, 
in  others  less.  We  have,  therefore,  to  inquire  (1)  how  firr  the 
comimmity  can  afford  labour  for  remote  results,  and  (2)  how  far 
it  is  likely  so  to  ajiply  its  labour;  and,  as  regards  this  second 
point,  we  have  to  ask,  in  particular,  how  far  the  individuals 
whose  saving  mainly  determines  this  direction  of  labour  will  be 
willing  to  jirefer  remote  results  to  immediately  consumable 
utilities. 

The  fund  from  which  saving  might  be  made  is  what,  in  § 2, 
I proposed  to  call  the  net  produce  of  labour  of  the  com- 
munity; i.e.,  what  can  be  produced  by  any  society  in  ant- 
given  period,  over  and  above  what  is  required  to  supply  the 
necessaries  of  life  to  all  engaged  in  production, — and  to  children 


CHAP.  VI 


LAWS  OF  PRODUCTION 


161 


and  others  necessarily  dependent  on  them, — and  to  compen- 
sate for  the  deterioration  of  the  previously  existing  capital. 
This,  so  far  as  it  can  be  determined,  gives  the  maximum  of 
possible  saving  within  the  period.  But  as  we  have  seen,  the 
line  between  “necessary”  and  “superfluous”  consumption  cannot 
be  sharply  drawn ; and  it  is  the  less  necessary  to  attempt  to 
draw  it  with  precision,  since  the  maximum  above  indicated  has 
never  been  approached  in  any  community  of  human  beings; 
the  motives  which  prompt  men  to  save  having  always  proved 
weaker  than  the  motives  which  prompt  them  to  spend,  long 
before  this  maximum  has  been  reached.  Still,  so  far  as  we 
limit  our  investigation  to  cases  where  we  may  assume  that 
the  primary  needs  of  the  human  beings  considered  are  an  ap- 
proximately constant  quantity',  we  may  clearly  lay  dmvn  that 
the  possible  maximum  of  saving  increases  as  the  gross  produce 
of  labour  (per  head)  increases,  but  in  a greater  ratio.  Hence, 
if  the  resultant  force  of  the  impulses  that  prompt  men  to  save, 
when  balanced  against  those  that  prompt  them  to  spend,  could 
also  be  assumed  to  be  constant,  the  accumulation  of  capital — 
when  it  once  had  fairly  commenced — would  tend  to  increase  at 
a continually  accelerated  rate. 

But  this  latter  assumption  manifestly  diverges  widely  from 
facts.  The  tendency  to  save,  like  the  tendency  to  spend,  is  the 
complex  result  of  a number  of  different  impulses,  some  self-re- 
garding, some  sympathetic;  and  continually  varies,  partly  in 
proportion  to  the  strength  of  these,  partly  from  variations  in  the 
intellectual  condition  of  human  beings,  and  partly  from  external 
causes.  Even  if  we  suppose  the  desires  of  the  personal  enjoy- 
ments derivable  from  wealth  to  remain  unaltered,  any  important 
change  either  (1)  in  the  prospects  of  security  afforded  by  the 
physical  or  political  circumstances  of  the  community,  or  (2)  in 
the  average  individual’s  power  of  foresight  and  capacity  of  being 
moved  to  action  by  the  representation  of  remote  consequences, 
or  (3)  in  the  range  or  intensity  of  his  sympathetic  interests, 

' This  assumption  is  often  manifestly  untrue  when  we  are  comparing  the 
productive  efficiency  of  different  races.  The  reason,  for  example,  why  the 
competition  of  “Chinese  cheap  labour”  is  so  menacing  to  the  English  race 
in  America  and  Australia  seems  to  lie  in  the  smaller  necessary  consumption 
of  the  average  Chinaman,  as  compared  with  that  of  an  average  Englishman- 
which  renders  the  net  produce  of  the  former’s  labour  greater,  though  the  gross 
produce  is  less. 


S.  P.  E. 


11 


162 


POLITICAL  ECONOMY 


BOOK  I 


especially  those  due  to  family  affection  or  patriotism  local  or 
general,  must  affect  materially  the  general  disposition  to  save. 
Now  no  economist,  so  far  as  I know,  has  attempted  to  determine 
the  laws  of  variation  of  these  conditions.  In  fact,  the  only 
general  “ law  of  the  increase  of  capital  ” — beyond  a mere*  state- 
ment of  the  above-mentioned  conditions  of  variation — that  Milk, 
for  example,  appears  to  lay  down,  is  the  abstract  proposition  that, 
other  things  being  equal,  the  “ effective  desire  of  accumulation  ” 
will  vary,  directly  with  the  “ pecuniar}^  inducement  ” to  accu- 
mulate ; that  is,  with  the  rate  of  interests  Thus,  other  things 
being  the  same,  if  the  rate  of  interest  falls,  the  supply  of  new 
capital  on  which  the  interest  will  have  to  be  paid  will  tend  to 
be  less : if  it  rises,  more.  This  abstract  proposition  is  probably 
true  on  the  whole ; but  even  this  seems  to  me  less  simple  and 
certain  than  Mill  represents  it,  since  the  total  effect  of  a fall  in 
interest  is  the  result  of  a number  of  tendencies  which  to  an  im- 
portant extent  act  in  contrary  directions.  So  far,  indeed,  as  a 
man  is  induced  to  save  hot  by  the  desire  to  attain  any  particular 
definite  end,  but  by  a general  estimate  of  future  resources  as  com- 
pared with  present  enjo}^Tnents  for  himself,  his  family,  or  others 
whom  he  may  wish  to  benefit,  it  is  obvdous  that  any  diminution 
in  the  yield  of  his  savings  must  pro  tanto  decrease  this  in- 
ducement. But  it  would  seem  that  in  most  cases  the  motives 


' Political  Economy,  Book  I.  c.  xi. 

2 In  this  passage,  as  in  another  quoted  soon  after,  Mill  appears  to  use  the 
terms  “interest”  and  “profit”  as  practically  convertible,  though  he  elsewhere 
carefully  distinguishes  them.  This  does  not  seem  to  me  contrary  to  usage ; as 
“ profit  ” is  I think  often  used  in  a wide  sense  for  all  “ returns  to  capital,”  so  as  to 
include  as  one  species  “interest,”  which  always  denotes  the  additional  wealth 
continually  obtained  by  the  mere  ownership  of  capital,  or  the  price  paid  for  the 
temporary  use  of  it  by  the  employer  of  capital  who  does  not  own  it.  Still,  it 
seems  to  me  more  convenient,  when  we  are  endeavouring  to  ascertain  as  pre- 
cisely as  possible  the  law  of  the  increase  of  capital,  to  distinguish  the  terms ; 
and  to  denote  by  “profit”  the  yield  of  capital  to  the  employer  who  is  also  the 
owner.  If  this  distinction  is  taken,  it  will  evidently  be  “interest”  rather  than 
“ profit  ” which  supplies  the  motive  to  accumulation,  in  the  case  of  aU  persons 
except  those  who  employ  their  own  capital ; and  it  wiU  be  so  even  as  regards 
these  latter,  so  far  as  they  are  able  to  borrow  what  they  can  profitably  employ 
in  their  business  at  the  ordinary  rate  of  interest,  allowance  being  made  for  risk. 
Hence  it  seems  to  me  best  to  use  “interest  ” exclusively  in  the  present  discussion ; 
though  it  ought  to  be  borne  in  mind  that  so  far  as  an  employer  believes  that  he 
could  advantageously  use  capital  that  he  is  not  able  to  borrow  at  the  ordinary 
rate,  he  will  have  an  additional  stimulus  to  save. 


CHAP.  VI 


LAWS  OF  PEODUCTION 


163 


for  accumulation  are  not  of  this  general  character.  In  the  first 
place,  men  in  business  and  the  professions  save,  to  a great 
extent,  with  a view  of  obtaining  a certain  income  from  their 
savings ; the  amount  of  which  they  conceive  beforehand  with 
more  or  less  definiteness,  whether  their  aim  is  to  retire  from 
business  themselves  or  to  provide  for  their  children.  It  is 
obvious  that  a».  lowering  of  the  rate  of  interest,  as  it  would 
render  a larger  amount  of  saving  necessary  to  obtain  a given 
income,  would  have  a certain  tendency  to  increase — instead  of 
decreasing — the  amount  annually  saved  by  such  persons.  Again, 
a large  amount  is  annually  saved,  especially  by  poorer  persons, 
not  so  much  for  the  sake  of  the  interest  as  in  order  to  have  the 
principal  “ against  a rainy  day  ” : all  such  saving  will  be  scarcely 
at  all  affected  by  any  change  in  the  rate  of  interest.  Further, 
we  have  to  take  into  account  the  great  influence  of  habit  and 
social  custom  in  determining  the  apportionment  of  income 
between  expenditure  and  accumulation.  Many  persons  have 
a nearly  fixed  standard  of  living,  and  so  long  as  their  income  is 
more  than  sufficient  to  provide  for  this,  they  merely  save  the 
surplus  whatever  it  may  happen  to  be.  In  proportion  as  this  is 
the  case,  their  saving  will  only  be  diminished  by  a fall  in 
interest  so  far  as  their  income  is  diminished  by  it : and  it  is  in 
no  way  necessary  that  a fall  in  interest  should  be  accompanied 
by  a decrease  in  the  average  income  of  individual  members 
of  the  community.  In  fact,  as  Mill  points  out,  “ a fall  in 
“ the  rate  of  interest  is  frequently  itself  the  result  of  a great 
“ accumulation  of  capital ; and  the  income  derived  from  a 
“ large  amount  of  capital  at  a low  rate  of  interest  generally 
“gives  a greater  total  power  of  saving  than  the  income  de- 
“ rived  from  a small  amount  of  capital  at  a high  rate  of 
“ interest.” 

It  appears,  therefore,  that  a fall  in  the  yield  of  capital  is 
likely  partly  to  diminish  the  inducements  to  save,  partly  to 
increase  them,  partly  to  influence  saving  in  a manner  which 
we  cannot  precisely  determine  till  we  know  the  special  causes 
of  the  fall.  I think  it  probable  that  the  first  of  these  effects 
will  generally  preponderate  over  the  others ; but  I do  not  think 
that  we  can  say  that  this  will  certainly  be  always  the  case,  still 
less  to  what  extent  it  will  be  so. 

On  similar  grounds  I should  regard  as  rather  too  dogmatic 

11—2 


164 


POLITICAL  ECONOMY 


BOOK  I 


Mill’s  subsequent  statement*  that  “there  is  at  every  time  and 
“ place  some  particular  rate  of  profit,  which  is  the  lowest  that 
“ will  induce  the  people  of  that  country  and  time  to  accumulate 
“ savings,  and  to  employ  those  savings  productively.”  I do  not 
doubt  that  this  is  true  of  England  at  the  present  time, — though 
I see  no  means  of  determining  precisely  what  the  minimum 
rate  in  question  is,  here  and  now.  But  I know  no  conclusive 
general  reason  for  regarding  the  prospect  of  interest  as  the  only 
possible  spring  of  accumulation  and  productive  investment ; and 
I think  it  quite  conceivable  that,  at  some  future  period  of  the 
world’s  history,  accumulation  might  go  on  much  as  at  present 
with  average  net  interest  at  or  barely  above  zero-. 

* Book  IV.  c.  iv.  Here  again  Mill  must  evidently  be  understood  to  use  the 
term  “profit”  as  convertible  with  “interest”;  since  in  another  paragraph  he 
speaks  of  a “profit  or  interest  of  three  or  four  per  cent.”  as  being  “a  sufficient 
“ motive  to  the  increase  of  capital  in  England  at  the  present  day.” 

- Such  a fall  would  doubtless  somewhat  increase  the  accumulation  of  con- 
sumers’ capital  at  the  expense  of  productive  investment;  but  it  must  be 
remembered  that  the  keeping  of  consumers’  capital  must  always  involve  some 
degree  of  risk,  and  some  trouble  or  outlay.  In  connexion,  however,  with  this 
conjectural  forecast  the  following  point  should  be  rnoticed.  The  new  savings  of 
individuals  are  partly  absorbed  by  sales  of  capital  already  invested  by  persons 
who  wish  to  spend  some  of  their  capital ; the  saving  of  one  set  of  people  being 
thus  balanced  by  the  spending  of  others.  Now  in  what  has  been  said  we  have 
supposed  that  the  community  is  adding  to  its  real  capital,  and,  therefore,  that 
some  part  of  the  savings  of  individuals  has  to  take  the  form  of  new  instruments 
of  industry.  If,  however,  the  rate  of  interest  falls  through  this  accumulation  of 
instruments,  such  previously  existing  instruments — especially  land — as  have  not 
had  their  utility  impaired  by  the  competition  of  the  new  capital,  will  (as  we  have 
already  observed)  have  their  selling  value  increased:  and,  therefore,  the  sales  of 
such  instruments  by  persons  intending  to  consume  the  proceeds  will  absorb  a 
continually  increasing  amount  of  savings.  This  consideration  becomes  im- 
portant when  we  forecast  the  consequences  of  a continual  fall  in  the  rate  of 
interest.  Its  effects  will  be  most  easily  shewn  by  making  an  extreme  suppo- 
sition. Let  us  suppose  that,  owing  to  the  steady  increase  of  savings,  more 
rapidly  than  the  enlargement  of  the  field  of  employment  of  capital  through 
invention,  &c.,  interest  by  2000  a.d.  has  fallen  to  a third  of  its  present  rate  in 
England ; and  that  rents  on  the  average  have  been  doubled  through  the 
increasing  scarcity  of  land.  It  is  obvious  that  land  will  sell  at  six  times  its 
present  price ; and  that  therefore,  the  sale  of  any  given  portion  will  be  capable  of 
absorbing  six  times  the  amount  of  saving  that  it  would  absorb  at  present.  And 
if  we  carry  the  supposition  of  a fall  in  interest  still  further,  it  will  be  evident — 
still  assuming  rents  at  least  not  to  fall  in  value — that  before  saving  could 
increase  to  such  an  extent  as  to  make  the  interest  on  capital  merely  cover  risk, 
so  that  investment  was  no  better  than  hoarding,  the  value  of  lend  must  have 
become  infinite.  And  the  same  may  be  said  of  the  value  of  any  irredeemable 


CHAP.  VI 


LAWS  OF  PRODUCTION 


165 


§ 5.  But  even  if  the  laws  of  the  saving  of  individual 
members  of  any  community,  within  any  given  period,  could  be 
determined  more  precisely  than  appears  to  me  to  be  the  case, 
there  are  several  reasons  why  the  result  would  give  us  no  exact 
guidance  as  to  the  increase  of  “ social  capital  ” — that  is,  of  the 
productive  resources  of  the  community  derived  from  past  labour 
— within  the  period. 

In  the  first  place, — if  we  mean  by  a “ community  ” a single 
nation,  and  not  the  whole  aggregate  of  human  beings  more  or 
less  united  through  exchange  into  one  industrial  organisa- 
tion,— it  should  be  observed  that  communities  may,  and  in 
modern  times  largely  do,  lend  their  capital  to  other  com- 
munities instead  of  employing  it  themselves ; so  that  the 
supply  of  new  capital  for  home  employment  may  be  reduced, 
without  any  fall  in  the  rate  of  interest,  merely  because  more 
attractive  openings  for  investment  have  presented  themselves 
abroad.  Of  course  this  foreign  investment  of  capital  increases 
the  share  obtained  by  the  community  of  the  produce  of  the 
world’s  labour ; but  it  does  not  increase  the  productiveness  of 
the  labour  of  the  community,  except  in  an  indirect  and  uncer- 
tain way,  so  far  as  it  extends  the  opportunities  and  increases 
the  advantages  of  foreign  trade.  And  secondly,  even  in  the  case 
of  home  investments,  we  must  note  that  a large  amount  of  the 
ordinary  savings  of  the  community  may  be  absorbed  in  meeting 
physical  or  social  emergencies,  which  impose  large  occasional 
outlays  on  the  community  as  a whole,  but  do  not  make  the 
labour  of  the  community  more  productive.  In  modem  times, 
this  is  most  conspicuously  exemplified  by  the  large  loans  of 
governments  for  piuyioses  of  war;  the  issue  of  any  such  loan 
tends  to  increase  the  aggregate  capital  of  individuals  without 
any  real  increase  in  social  capitaU. 

But  even  in  the  case  of  any  productive  home  investment 
of  savings  the  profit  to  the  individual  investing  is  a very 
uncertain  indication  of  the  advantage  to  the  community. 
For  the  investment  may  destroy  or  reduce  the  utility  of 
previously  invested  capital ; as  when  a railway  is  constructed 

perpetual  annuities  that  may  have  been  sold  by  governments  or  private  cor- 
porations. 

^ The  occasional  needs  of  a portion  of  the  community  may  similarly  absorb 
the  savings  of  the  rest  to  a very  varying  extent. 


166 


POLITICAL  ECONOMY 


BOOK  I 


which  takes  away  traffic  from  an  already  existing  railway,  or 
a shop  with  expensive  front,  fittings,  &c.,  is  successfully  designed 
to  attract  custom  from  another  shop.  The  progress  of  invention, 
which  continually  modifies  the  field  of  employment  for  capital, 
continually  affords  opportunities  for  fresh  investments, — as  in 
newly  invented  machinery,  &c., — inevitably  tending  to  reduce 
the  value  of  portions  of  capital  already  in  existence,  to  an  extent 
which  varies  indefinitely^  and  can  hardly  ever  be  exactly  ascer- 
tained. In  such  cases,  then,  the  gain  to  the  community  from  the 
new  investment  may  be  much  less  than  the  interest  earned  by  the 
investing  individual;  when  we  take  into  account  the  destruction 
of  the  utility  of  the  previously  existing  capital.  On  the  other 
hand,  it  is  equally  possible  that  it  may  be  much  more.  For 
the  social  profit  of  an  improvement  in  the  instruments  of 
production  will  obviously  accrue  in  part  to  the  consumers  of  the 
commodities  produced,  so  far  as  producers  using  the  improved 
instruments  are  forced  by  competition  to  reduce  the  price 
of  their  products  below  what  was  required  to  remunerate  the 
less  efficient  production  which  they  have  superseded. 

Further,  while  the  progress  of  industrial  civilisation  causes 
the  depreciation  of  some  previously  existing  capital,  it  adds 
value  to  other  durable  results  of  previous  labour  productively 
applied,  which  are  protected  by  circumstances  from  competition, 
siich  as  buildings  in  towns  well  situated  for  business.  The  re- 
sulting addition  to  the  value  of  existing  capital  is,  of  course, 
not  due  to  saving ; while  yet — if  caused  by  an  actual  increase 
in  the  utility  of  the  durable  wealth  in  question — it  may  be 
a real  addition  to  social  capital. 

We  must  also  note  the  large  amount  pf  results  of  labour 
for  remote  ends,  more  or  less  profitable  to  the  community, 
which  are  not  included  in  the  “ saving  ” of  individuals  as 
ordinarily  estimated ; and  which  come  but  vaguely  and  slightly 
(if  at  all)  within  the  operation  of  the  law’  of  such  saving,  as 
above  formulated.  Under  this  head  wdll  come  a large  amount  of 
the  improvements  of  agriciiltural  land  under  a system  of  small 

' Improvements  may  easily  be  imagined  which  would  annihilate  vast  portions 
of  the  productively  invested  wealth  of  individuals ; such,  for  example,  as  a 
mechanical  invention  that  superseded  railways  in  England,  or  a development  of 
trade  that  rendered  English  wheatgrowing  unprofitable  : and  economic  changes 
of  this  kind,  though  smaller  in  degree,  are  continually  occurring. 


CHAP.  VI 


LAWS  OF  PRODUCTION 


167 


fanning  (especially  if  the  cultivator  be  also  the  owner) ; and 
similarly,  a large  part  of  the  labour  for  remote  results,  that  is 
spent  in  utilising  the  opportunities  continually  presented  for  the 
successful  establishment  of  new  lucrative  businesses  in  trade. 
Such  labour  can  be  but  slightly  affected  by  changes  in  the  rate 
of  interest.  Still  less  is  such  a consideration  ordinarily  operative 
in  determining  the  accumulation  of  the  durable  wealth  that 
we  have  called  “ consumers’  capital  ” ; so  far  at  least  as  such 
wealth  is  commonly  owned  by  the  persons  using  it. 

Finally,  we  must  not  leave  out  of  our  calculation  the  increase 
of  social  resources  due  to  labour  from  time  to  time  expended  in 
founding  and  developing  institutions  of  public  utility — edu- 
cational, sanitary,  and  the  like — by  which  no  profit  is  earned 
for  individuals.  Above  all  we  must  take  account  of  the  eco- 
nomic advantages  of  the  greatest  of  human  institutions,  the 
State ; in  building  up  which  so  much  toil  and  other  sacrifices 
have  been  incurred  for  distant  results,  from  motives  of  patriotism 
or  love  of  glory,  without  any  reckoning  of  pecuniary  returns  to 
the  individuals  who  have  laboured.  A statement  of  the  Laws 
of  Production  is  undeniably  incomplete  without  an  attempt  to 
estimate  systematically  the  economic  benefits  and  drawbacks 
that  spring  from  different  political  institutions  and  different 
principles  and  methods  of  administration.  It  seems,  however, 
most  convenient  to  defer  all  consideration  of  the  tendencies  of 
different  modes  of  governmental  interference,  until  in  the 
concluding  book  we  come  to  discuss  these  tendencies  from  the 
point  of  view  of  Art  or  Practice,  and  ask  “ How  far  (if  at  all) 
“ and  in  what  way  ought  Government  to  intervene  with  a view 
“ to  making  the  produce  of  industry  a maximum.”  The  answer 
to  this  question  will  indirectly  supply  an  answer  to  the  corre- 
sponding question  that  we  should  naturally  raise  here  from  the 
point  of  view  of  science ; so  far,  that  is,  as  it  seems  to  be  within 
the  province  of  the  theoretical  economist  to  deal  with  this  latter 
inquiry. 


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BOOK  II. 

DISTRIBUTION  AND  EXCHANGE. 


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CHAPTER  I. 


INTKODUCTION. 

§ 1.  We  have  now  to  consider  what,  in  accordance  with 
usage,  I have  given  as  the  second  part  of  the  subject  of 
economic  science : the  Theory  of  Distribution  and  Exchange. 
The  notion  of  “ Exchange  ” may  be  taken  as  sufficiently  clear : 
but  “Distribution”  requires  some  further  explanation*.  In  the 
first  place  it  should  be  observed  that  it  is  not  strictly  the 
Distribution  of  Wealth,  but  the  Distribution  of  Produce,  with 
which  we  are  primarily  concerned.  We  suppose  a society  in 
which  the  main  part  of  the  land  and  other  instruments  for 
producing  wealth  are  already  distributed  among  the  members 
as  their  private  property : and  this  pre-existing  distribution  of 
producers’  wealth  we  do  not  profess  to  explain.  Nor  is  it 
absolutely  necessary,  up  to  a certain  point  of  our  investigation, 
to  make  any  general  assumption  with  regard  to  it : but  in 
working  out  the  details  of  our  theory,  we  shall  have  to  take 
note  of  the  inequality  that  is  characteristic  of  this  pre-existing 
distribution  in  all  existing  civilised  societies.  We  shall  have 
to  suppose  that  some  persons  own  land  and  some  capital  in 
varying  and  sometimes  considerable  amounts,  and  that  others 
have  little  or  none  of  either ; and  that  in  neither  case  are  the 
owners  and  the  users  altogether  coincident.  And  it  is  con- 
venient to  assume  this  inequality  throughout. 

* To  prevent  misunderstanding,  I never  employ  the  word  “ Distribution” — as 
it  is  sometimes  used — to  denote  or  include  the  processes  of  conveyance  and 
retail  trade  that  intervene  between  the  completed  manufacture  of  a consumable 
article  and  the  commencement  of  its  consumption.  According  to  the  view  taken 
in  the  present  treatise,  these  processes  are  conceived  as  a part  of  the  whole 
process  of  Production.  See  page  12. 


172 


POLITICAL  ECONOMY 


BOOK  II 


We  may  state,  then,  the  main  question  which  a Theory  of 
Dist  ibution  attempts  to  answer  as  follows:  “According  to  what 
“ 1 .ws  is  the  new  increment  of  commodities,  continually  pro- 
“ duced  by  the  combination  of  the  labour  and  unequally  dis- 
“ tributed  capital  (including  land)  of  different  members  of  the 
“community,  shared  among  the  different  classes  of 'persons  w'ho 
“ have  co-operated  in  producing  it,  either  by  their  personal 
“ exertion — bodily  or  mental — or  by  allowing  others  to  use  their 
“ wealth,  knowledge,  or  other  resources  ? ” The  main  part  of  this 
produce  consists  of  the  food,  clothing,  and  other  kinds  of 
consumable  wealth  that  are  continually  being  made  by  pro- 
ducers and  transferred  to  consumers : but  this  is  not  the  whole 
of  it.  For,  firstly,  it  seems  best  to  include  under  the  term 
“ produce  ” all  purchaseable  commodities,  whether  “ embodied  in 
“material  objects”  or  not;  on  the  grounds  urged  in  the 
preceding  book'  (where,  however,  this  extension  of  the  meaning 
of  “ produce  ” was  not  fully  adopted).  Our  object  is  to  study 
the  causes  of  the  different  extents  of  command  over  “ neces- 
“ saries  and  conveniences,”  obtained  respectively  by  different 
members  of  the  community,  through  the  complicated  system  of 
co-operation  by  means  of  exchange  on  which  the  life  of 
modern  society  depends ; and  since  some  portion  of  each  one’s 
money  income  is  spent  in  purchasing  not  material  wealth  but 
education,  professional  advice,  &c.,  we  must  regard  these 
utilities,  no  less  than  the  material  products  of  industry,  as 
practically  “ distributed  ” through  the  medium  of  the  money 
payments  that  determine  the  nominal  incomes  of  indmduals : 
and  the  laws  that  govern  the  exchange  values  of  these  im- 
material commodities  concern  us  as  much  as  those  regulating 
the  values  of  material  products. 

Again,  we  have  to  bear  in  mind  that  the  new  i\ealth 
produced  in  a society  that  is  growing  richer  wll  consist  partly 
of  new  “ producers’  wealth  ” — new  railways,  factories,  warehouses, 
an  increased  supply  of  new  raw  materials  to  be  hereafter  trans- 
formed into  consumers’  wealth,  and  new  auxiliary  materials 
such  as  coal  for  steam-engines,  &c.  Such  additions — so  far  as 
they  are  more  than  sufficient  to  compensate  for  the  continual 
destruction,  deterioration,  and  depreciation  of  capital — must  be 


' See  Book  I.  e.  iii.  § 4,  p.  8'*. 


CHAP.  I 


DISTRIBUTION  AND  EXCHANGE 


173 


regarded  as  part  of  the  produce  distributed : it  is,  in  fact, 
mainly  this  part  which  is  continually  “ saved  ” and  added  to 
the  already  existing  accumulation  of  capital  h 

“ Produce,”  so  understood,  is  nearly  equivalent  to  the  “ real 
“ income  ” of  the  community  during  the  period ; provided  that 
we  include  in  the  notion  of  “ real  income  ” the  unpurchased 
utilities  that  a man  derives  from  his  own  labour  or  the  unpaid 
labour  of  members  of  his  family — which  are  largely  unrepre- 
sented in  ordinary  estimates  of  his  money  income.  Such 
utilities,  indeed,  are  not  in  any  ordinary  sense  “ distributed  ” ; 
still,  we  cannot  leave  them  out  of  account  in  our  investigation 
of  the  laws  of  distribution,  at  least  if  they  have  a market  value 
or  if  the  labour  employed  on  them  is  of  a kind  that  might — 
and  under  other  circumstances  would — be  employed  in  pro- 
ducing saleable  commodities.  Of  this  kind,  for  instance,  is  the 
labour  of  cooking  food,  making  or  repairing  or  cleansing  clothes 
and  furniture,  teaching  children,  carrying  purchases  from  shops, 
and  walking  to  and  from  places  of  work : when  we  contemplate 
the  resulting  utilities  from  the  point  of  view  of  the  community, 
we  find  that  a portion  of  them,  varying  at  different  times  and 
places,  is  commonly  purchased,  and  another  portion  of  them 
commonly  unpurchased ; hence  it  would  be  manifestly  mislead- 
ing to  confine  our  attention  to  the  former,  and  to  leave  the 
latter  entirely  out  of  sight. 

A varying  portion  of  this  unpaid  labour  is  employed  in 
appropriating  and  utilising  those  “ spontaneous  gifts  of  nature,” 
which  at  certain  times  and  places  are  unpurchased  (except  by 
the  labour  of  appropriation,  &c.),  while  elsewhere  and  at  other 
times  they  command  an  extra  price  through  scarcity.  We  have 
already  seen^  that  in  comparing  the  wealth  of  different  societies 
at  different  times  and  places  we  must  include  these  unpurchased 
utilities  in  one  term  of  the  comparison,  if  utilities  of  the  same 
kind,  having  exchange  value,  are  included  in  the  other  term ; 
and  the  same  principle  will  obviously  apply  to  the  comparisons 

' There  is  some  difficulty  in  determining  precisely,  yet  so  as  to  avoid 
paradox,  the  notion  of  amount  of  produce  within  a given  period,  when  we 
include  in  “ produce  ” the  additions  to  capital : but  this  difficulty — which  is 
of  no  real  importance  in  relation  to  the  discussion  which  follows — will  be  more 
conveniently  dealt  with  later  on.  See  c.  vi.  § 1. 

^ Book  I.  c.  hi.  § 1. 


174 


POLITICAL  ECONOMY 


BOOK  ir 


that  have  to  be  made  in  considering  changes  and  differences  in 
distribution. 

Further,  we  have  to  note  that  an  important  part  of  the 
consumable  utilities  enjoyed  by  the  members  of  a civilised 
community  within  any  given  period — though  properly  included 
in  the  notion  of  “ real  income  ” — are  not  in  any  sense  the 
result  of  the  labour  exerted  within  the  period.  I refer  to  the 
utilities  derived  from  portions  of  consumers’  wealth — such  as 
land  and  buildings,  pictures,  statues,  jewels,  some  kinds  of 
books  and  furniture,  &c. — which  are  comparatively  durable;  and, 
consequently,  in  civilised  countries  are  often  handed  down  from 
father  to  son  for  many  generations.  Such  utilities  are  not 
commonly  included  by  economists  in  the  aggregate  of  which 
they  investigate  the  distribution ; but,  obviously,  they  cannot 
be  left  out  of  account  in  estimating  the  command — either  of 
individuals  or  of  the  community  generally — over  the  necessaries 
and  conveniences  of  life  within  any  given  periodh 

Still,  these  utilities  derived  from  domestic  labour  or  inherited 
consumers’  wealth  only  concern  us  in  a secondary  and  indirect 
way : our  primary  object  of  investigation  is  the  distribution  of 
the  produce  of  the  great  system  of  co-operation  through  exchange, 
which  forms  the  framework  of  modem  industrial  society.  We 
are  to  examine  the  causes  that  determine  the  shares  in  which 
the  aggregate  of  utilities  continually  produced  b}'  this  system 
is  divided  among  the  independent  individuals  who  have  co- 
operated in  producing  it.  We  shall  assume  generally  that  this 
division  is  brought  about,  as  it  mainly  is  in  a modem  industrial 
community,  by  free  bargaining  among  persons  seeking  each  his 
private  interest, — extending  the  term  “ private  ” to  include 
“ domestic  ” interest,  in  the  case  of  husbands  and  parents.  We 
shall,  accordingly,  take  note  in  a secondary  way  only  of  the 
domestic  redistribution  of  shares  industrially  earned  among 
members  of  a household  who  themselves  earn  little  or  nothing ; 
and  also  of  the  almsgi\dng  and  donations  of  wealth  for  public 
objects  by  which  the  inequalities  of  the  primary'  industrial 
distribution  of  produce  are  mitigated  and  its  deficiencies  supple- 

1 Of  course  to  some  extent  such  utilities  are  strictly  “ produced  ” within  the 
period ; so  far,  namely,  as  they  are  due  to  the  labour  required  from  time  to  time 
for  repairing  and  keeping  in  good  condition  houses  and  other  kinds  of  durable 
consumers’  wealth. 


CHAP.  I 


DISTRIBUTION  AND  EXCHANGE 


175 


merited ; — that  is,  only  so  far  as  these  supplementary  redistribu- 
tions influence  the  primary  industrial  division*.  And  so  far  as 
industrial  shares  are  to  any  considerable  extent  determined  by 
law,  custom,  or  current  opinion  as  to  what  is  just  or  equitable, 
excluding  or  overriding  free  contract,  our  reasonings  will  only 
be  applicable  to  them  in  a partial  and  qualified  manner". 

We  shall  also  exclude  from  our  present  consideratioi,.  the 
important  share  of  the  produce  appropriated  by  Government, 
so  far  at  least  as  concerns  the  transfer  of  this  share  from  the 
possession  of  individuals  to  that  of  the  State,  by  means  of 
taxation : though  when  we  consider  the  influence  exercised  on 
the  determination  of  wages  by  the  physical  needs  or  “ standard 
“ of  comfort  ” of  the  labourer  or  his  family,  we  must  of  course 
take  account  of  what  he  is  required  to  pay  for  the  services 
of  Government.  Moreover,  the  redistribution  of  the  collected 
ta:!tes  among  the  members  and  employees  of  government,  and 
in  the  way  of  governmental  expenditure,  so  far  as  it  proceeds  by 
free  contract,  is  to  a great  extent  similar  in  its  determination 
and  effects  to  the  distribution  through  free  contract  of  the  rest 
of  the  produce. 

§ 2.  The  shares  of  this  industrial  distribution  are  classified 
in  ordinary  economic  discussion  as  (1)  wages  of  labour — -a  term 
which  may  conveniently  be  extended  to  include  what  are  more 
commonly  called  the  earnings  or  salaries  of  the  higher  kinds  of 
labourers;  (2)  profits  of  persons  employing  labour  together  with 
capital  and  sometimes  land;  (3)  payments  made  to  owners 
of  land  or  other  capital  when  employed  by  non-owners,  further 
distinguished  as  (a)  rent  paid  for  land  or  buildings,  and 
(6)  interest  paid  for  the  use  of  “ money  ” as  is  commonly 
said,  or  of  “ capital  ” as  economists  generally  say. 

Without  at  present  attempting  a more  exact  demarcation  of 
these  different  shares,  it  is  easily  seen  that  each  share  repre- 
sents the  price  paid  by  society  for  a certain  service  or  utility 
contributed  by  the  recipient  of  the  share.  In  the  case  of 

* For  instance,  in  investigating  the  minimum  below  which  wages  cannot 
permanently  fall,  the  effects  of  almsgiving,  and  of  public  provision  for  paupers, 
have  to  be  taken  into  account. 

2 In  the  last  chapter  of  this  book  I have  endeavoured  to  reduce  within 
its  proper  limits  the  currently  recognised  opposition  between  Competition  and 
Custom. 


176 


POLITICAL  ECONOMY 


BOOK  11 


wages,  interest,  and  rent,  this  fact  is  obvious ; since  wages 
are  paid  directly  for  labour,  rent  for  the  use  of  land,  and 
interest  for  the  use  of  money  or  other  capital.  A little 
more  reflection  is  required  to  see  the  exact  nature  of  the 
utility  remunerated  by  profits.  The  profit  obtained  in  any 
year  by  a man  of  business  is  only  ascertainable  indirectly, 
by  taking  the  value  of  his  capital  (including  land)  at  the 
end  of  the  year,  adding  what  he  has  taken  out  of  his  busi- 
ness from  time  to  time  for  consumption,  and  subtracting  the 
value  of  his  original  capital.  In  many  businesses  the  result  of 
this  calculation  will  vary  veiy  greatly  in  different  years ; some- 
times, doubtless,  falling  considerably  below  zero.  Still  we  may 
assume  that,  on  the  average,  the  profit  obtained  by-  a business  in 
which  a given  amount  of  capital  is  employed  must  be  materially 
greater  than  the  interest  that  could  be  got  by  lending  the  same 
amount;  and  that  the  labour  and  thought  required  for  the 
management  of  ca]')ital  is  not — like  (e.g.')  the  labour  of  writing 
second-rate  poems — supplied  gratuitously^  by  men  of  business  as 
a class.  This  excess,  then,  of  average  profit  over  possible 
interest  (and  sometimes  rent)  is  to  be  regarded  as  the  price 
which  society  pays  for  the  employer’s  labour ; and  we  may-  call 
it,  after  Mill,  the  employer’s  Wages  of  Management*. 

It  appears,  then,  that  in  all  cases  the  different  shares  of  the 
produce  are  obtained  by  what  is,  substantially-  if  not  formally, 
an  exchange  of  certain  services  for  the  price  that  they  will  fetch 
in  the  market.  The  distribution,  in  fact,  that  we  have  to 
investigate  is  essentially-  Distribution  through  Exchange  ; in- 
volving usually^  a double  exchange,  of  services  for  money  and 
of  money  for  consumable  commodities.  It  is  from  this  in- 
timate connexion  of  the  two  notions  that  I am  unable  to 
follow  Mill  in  separating  the  theory-  of  distribution  from 
the  theory  of  the  exchange  value  of  material  commodities. 
Mill’s  procedure  was  due,  I think,  partly-  to  an  erroneous 
view  of  the  laws  governing  wages  and  profits ; partly-  to 
a wish  to  lay  stress  on  the  extent  to  which  the  shares  of 
produce  have  actually-  been  determined  not  by  free  bargaining, 
but  by  custom.  And  it  is,  no  doubt,  a noteworthy  fact  in 

1 Mill’s  own  term  is  “Wages  of  Superintendence”;  but  “superintendence” 
seems  to  me  less  adapted  than  “ management  ” to  denote  the  whole  of  the 
complex  function  of  the  entrepreneur  of  a business. 


CHAP.  I 


DISTRIBUTION  AND  EXCHANGE 


177 


economic  history  that  wages,  interest,  and  rent  have  con- 
tinued to  be  more  or  less  determined  by  law  or  custom  long 
after  the  prices  of  products  had  come  to  be  generally  settled  by 
the  free  “ higgling  of  the  market.”  But  this  divergence  belongs 
to  a stage  in  economic  development  which  the  most  industrially 
advanced  portions  of  civilised  mankind  have  now,  in  the  main, 
left  behind  ; in  the  modern  industrial  community  wages,  interest, 
and  rent  directly,  and  profits  indirectly,  are,  in  the  main,  as 
much  determined  by  free  contract  as  the  prices  of  material 
commodities. 

It  remains  to  decide  whether  we  shall  examine  first  the 
remunerations  of  producers  or  the  prices  of  products.  I have 
adopted  the  latter  course,  chiefly  because  in  examining  the 
prices  of  products,  we  shall  be  dealing  approximately  with 
concrete  facts,  phenomena  of  industry  admitting  of  statistical 
investigation ; whereas  the  remunerations  of  different  classes  of 
productive  services,  as  defined  by  economists,  are,  to  a greater 
extent,  elements  arrived  at  by  abstract  economic  analysis. 
Accordingly,  as  one  of  my  chief  aims  is  to  eliminate  con- 
troversies due  to  an  unguarded  use  of  abstract  conceptions, 
it  seemed  on  the  whole  most  convenient  to  begin  as  close  as 
possible  to  concrete  facts,  and  proceed  gradually  from  them  to 
such  abstract  notions  as  {e.g.)  that  of  Ricardian  Rent.  I shall, 
therefore,  occupy  the  two  following  chapters  with  an  examination 
of  the  laws  according  to  which  the  Exchange  Value  of  material 
products  tends  to  be  competitively*  determined.  The  value 
of  Money  will  require  a separate  discussion,  as  the  defini- 
tion of  the  term  Money  has  first  to  be  carefully  considered. 
Accordingly,  the  fourth  and  fifth  chapters  will  be  occupied 
respectively  with  the  Definition  of  Money,  and  the  theory  of 
the  Value  of  Money ; from  which  latter  subject  we  shall  pass 
by  an  easy  transition  to  the  determination  of  Interest,  with 
which,  in  the  sixth  chapter,  the  exposition  of  the  Theory  of 
Distribution  will  commence. 

Note.  Mr  Walker,  in  his  instructive  book  on  The  Wages 
Question  (chap,  i.),  states  that  “ vast  amounts  of  wealth  are  ex- 
“ changed  which  are  not  distributed”;  giving  as  an  example  the  case 

* I have  adopted  this  phrase  as  a convenient  abbreviation  for  “determined 
“under  the  influence  of  free  competition.” 

S.  P.  E. 


12 


178 


POLITICAL  ECONOMY 


BOOK  II 


of  a small  American  farmer,  proprietor  of  a farm  in  one  of  the 
Southern  sea-board  States,  for  which  he  and  his  family  supply  all  the 
labour  required.  He  says  that  all  the  cotton  produced  on  such 
a farm  is  “ not  distributed,”  though  it  is  “ exchanged,  being  sold 
“ to  purchase  breadstuffs,  clothing,  West-India  goods,  <fec.”  This 
seems  to  me  to  imply  a misleadingly  narrow  view  of  Distribution. 
The  cotton,  no  doubt,  is  not  distributed  hy  the  farmer  ; but  I 
conceive  that  the  breadstuffs,  clothing,  &c.  are  properly  regarded 
as  distributed  to  him.  They  constitute  his  share  of  the  aggregate 
produce  of  the  industrial  society  of  which  he  is  a member ; a 
share  which  increases  or  diminishes,  ^according  as  the  value  of 
the  service  rendered  by  him  to  society  in  producing  cotton  rises 
or  falls,  that  is,  as  compared  with  the  services  rendered  by  the 
producers  of  breadstuffs,  Ac.  And  similarly,  of  course,  the  cotton 
sold  by  him  will  be  distributed  through  exchange  among  other 
producers. 


CHAPTER  II. 


THEORY  OF  EXCHANGE  VALUE  OF  MATERIAL  PRODUCTS. 

§ 1.  The  main  assumptions  on  which  English  economists 
since  Ricardo  have  generally  proceeded,  in  their  investigations 
of  the  laws  of  value,  have  been  briedy  discussed  in  an  earlier 
chapter*.  But  before  examining  the  theory  in  detail,  it  will 
be  desirable  to  state  these  assumptions  again  somewhat  more 
fully ; because,  although  the  actual  facts  of  industry  coiTespond 
to  them  approximately,  the  degree  of  approximation  varies  very 
much  in  different  cases. 

1.  We  assume  that  eveiy  person  concerned  in  the  ex- 
change of  the  article  in  question  aims  with  ordinary  intelligence 
at  selling  his  goods  for  the  highest  price  which  he  can  get  for 
them ; neither  law  nor  custom  intervening  so  as  seriously  to 
affect  the  success  of  his  endeavour.  When  this  assumption 
is  stated  in  its  most  general  form,  we  must  understand  “ price  ” 
to  mean  “ balance  of  total  advantages  obtained  by  the  trans- 
“ action  over  any  drawbacks  that  may  be  incident  to  it.”  But, 
generally  speaking,  in  the  sale  of  material  ])roducts,  the  only 
drawback  is  the  expense  of  forwarding  the  article  to  the  buyer 
(so  far  as  this  is  undertaken  by  the  seller)  which  may  be  simply 
subtracted  from  the  price ; while  the  advantages,  with  one  im- 
portant exception,  are  wholly  comprised  in  the  money-price  of 
the  article.  The  exception  is  that  a dealer  frequently  has  an 
interest  in  dealing  with  one  class  of  purchasers  rather  than 
another,  with  a view  to  the  establishment  of  a luisiness.  But 
within  large  limits  it  is  in  most  cases  true  that  any  differences 
among  purchasers  are  indifferent  to  the  seller  of  goods,  except 
so  far  as  one  offers  a higher  money-price  than  another ; and,  for 


* Introduction,  c.  iii. 


12 2 


180 


POLITICAL  ECONOMY 


BOOK  II 


simplicity,  I shall  assume  this  to  be  the  case  in  the  following 
discussion. 

Generally  speaking,  there  are  many  independent  buyers  and 
sellers  making  similar  exchanges  at  approximately  the  .same 
time : and  if  they  act  without  concert, — though  the  effort  of 
each  party  to  obtain  the  most  favourable  terms  for  himself  will 
continually  tend  to  produce  an  approximate  unifomiity  in  the 
rates  of  exchange  for  similar  commodities, — there  will  continually 
be  slight  variations,  due  to  the  varying  needs,  circumstances, 
and  judgments  of  different  sellers  and  purchasers;  and  the 
changes  in  price  of  which  we  are  about  to  examine  the  causes 
will  take  place  through  an  unconcerted  coincidence  in  direction 
of  these  individual  variations.  This  is  the  condition  of  things, 
denoted  by  the  phrase  “ open  competition,”  which  is  commonly 
assumed  in  economic  reasonings.  Under  certain  circumstances, 
however,  it  is  the  interest  of  dealers  in  a commodity  to  enter 
into  a deliberate  combination  to  dictate  terms  of  exchange ; and 
here  and  there  an  individual — say  an  eminent  artist  or  the 
proprietor  of  a vineyard  of  special  (piality — controls  the  whole 
supply  of  some  uniquely  valuable  commodity  and  can  singly  fix 
its  price.  More  often,  again.  Monopoly  and  Competition  are 
combined : an  individual  or  combination  controls  so  large  a part 
of  the  supply  of  a certain  article  as  to  be  able  to  raise  or  lower 
its  price  at  will  within  certain  limits,  but  not  beyond  them. 
Such  cases  of  monopoly,  total  or  jiartial,  do  not  ordinarily  lie 
beyond  the  range  of  economic  science : we  can  generally’  deter- 
mine the  rate  of  exchange  which  enlightened  self-interest  will 
prompt  the  monopolist  to  offer  by  reasoning  similar  to  that  by 
which  we  determine  the  results  to  which  open  competition 
would  lead : and  it  is  important  practically,  as  well  as  for 
theoretical  completene.ss,  to  do  this.  In  the  present  chapter, 
however,  I shall  only  treat  of  monopoly  briefii'  and  by  way  of 
introduction  to  the  theory  of  competitive  prices ; reserving  a 
fuller  discussion  of  monopoly  and  combination  to  a later  chapter 
(chapter  X.). 

2.  Here,  therefore,  e.xcept  where  it  is  otherwise  stated,  I 
assume  that  the  competition  of  dealers  in  a market^  is  perfectly 

' The  chief  exceptional  case,  in  which  such  determination  may  be  excluded, 
is  where  monopolist  is  bargaining  with  monopolist.  See  c.  x.  g o. 

2 For  the  meaning  of  market,  see  p.  44. 


CHAP.  II  EXCHANGE  VALUE  OF  MATERIAL  PRODUCTS  181 


free  and  open ; that  the  prices  at  which  transactions  actually 
take  place  are  readily  ascertainable  by  all  dealers ; and  that,  in 
consequence,  at  the  same  time  and  place  wares  of  the  same 
quality  are  sold  for  approximately  the  same  money-price. 
Strictly  speaking,  we  have  no  ground  for  assuming  this  identity 
of  price,  except  where  the  quantities  sold  are  approximately 
the  same;  since  the  trouble  of  the  seller,  the  Remuneration  of 
which  is  included  in  the  price,  does  not  vary  materially  with 
the  amount ; so  that  we  should  expect  a reduction  of  price  for 
large  transactions.  And  in  fact  such  a reduction  is  actually  made 
in  certain  dealings  both  wholesale  and  retail.  It  is,  for  example, 
partly  on  this  account,  partly  from  the  importance  of  business 
connexion,  that  large  dealers  commonly  sell  to  the  retailers  of 
their  commodities  at  a price  lower  than  that  charged  to  pur- 
chasers for  consumption.  But  in  w'holesale  transactions  among 
dealers  it  is  generally  convenient  to  have  a fixed  price  (per 
unit)  for  all  amounts  in  which  it  is  worth  while  to  deal  at  all ; 
and  for  simplicity  we  will  suppose  this  to  be  the  case  in  the 
transactions  which  we  examine.  I shall  assume,  therefore,  that 
“ the  market  price  ” of  which  we  speak  is  at  any  given  time  and 
place  the  same  per  unit  for  all  quantities  sold.  The  market 
need  not  necessarily  be  at  one  place ; only  if  it  extend  over 
a considerable  space,  the  price  cannot  be  assumed  to  be 
strictly  the  same,  but  the  same  allowing  for  expenses  of 
transport. 

3.  I further  assume  that  the  products  whose  price  we 
are  investigating  are  made  solely  to  be  sold ; and  not  partly 
for  the  consumption  of  the  producer.  In  the  existing  organisa- 
tion of  industry,  the  extent  to  which  any  producer  supplies 
his  own  consumption  is  trifling  in  most  industries ; and  so  far 
as  the  case  is  otherwise,  we  may  conveniently  avoid  complication 
by  the  fiction  of  supposing  the  producer  to  sell  to  himself  at 
the  market-rate  whatever  share  of  his  own  products  he  and  his 
family  consume.  Only  wherever  this  share  is  a considerable 
proportion  of  the  whole,  as  is  sometimes  the  case  with  small 
agricultural  producers,  it  must  be  borne  in  mind  that  the  same 
individuals  have  to  be  regarded  in  two  aspects  at  once,  as  pro- 
ducers and  consumers ; and  that  their  gains  in  the  latter 
character  will  partially  counterbalance  any  losses  through  cheap- 
ness that  may  befall  them  in  the  former  character. 


182 


POLITICAL  ECONOMY 


BOOR  II 


4.  A minor  deviation  from  facts  which  it  is  convenient 
to  make  is  the  assumption  that  variations  in  price  are  con- 
tinuous. In  reality,  of  course,  the  difference  between  the  dif- 
ferent prices  of  the  smallest  quantity  customarily  sold  can 
hardly  be  less  than  the  smallest  current  coin ; and  in  retail 
sales  of  low-priced  articles  this  necessity  practically  modifies 
to  an  important  extent  the  effect  on  actual  prices  of  changes 
in  the  forces  determining  value. 

5.  Besides  “ commercial  competition  ” — to  use  Caimes’s 
phrases — I also  assume  effective  “ industrial  competition  ” 
within  the  region  contemplated.  That  is,  I assume  that  pro- 
ducers as  well  as  traders  aim  at  selling  their  services  for  the 
highest  price  attainable,  and  therefore  tend  to  be  attracted,  by 
a higher  rate  of  remuneration,  both  from  district  to  district, 
and  from  industry  to  industry.  Hence  I infer  (1)  that  ap- 
proximately the  same  wages  will  tend  to  be  paid  for  the  same 
quality  of  labour  in  any  one  industry ; and  (2)  that  when  the 
remuneration  of  labourers  or  capitalists  in  any  industry  is 
known  to  be  higher  than  that  of  labourers  or  capitalists  in 
some  other  industry  not  entailing  materially  greater  sacrifice 
or  outlay  or  requiring  scarcer  qualifications,  the  difference  will 
tend  to  be  gradually  reduced  by  the  attractions  which  this 
higher  remuneration  exercises  on  actual  or  prospective  labourers 
or  employers.  The  extent,  however,  to  which  this  tendency 
may  be  assumed  to  operate,  without  de\'iating  too  widely  from 
actual  facts,  will  require  careful  discussion. 

The  theory  of  market  values  or  prices,  as  determined  by 
supply  and  demand,  depends  on  the  assumption  of  commercial 
competition  (so  far  as  combination  is  excluded):  while  the 
theory  of  “ natural  ” or  “ normal  ” values  or  jjrices,  so  far  as 
they  are  determined  by  cost  of  production,  depends  on  the 
assumption  of  industrial  competition. 

§ 2.  J.  S.  Mill,  in  the  third  book  of  his  Political  Economy 
(chapters  i. — vi.),  has  given  an  explanation,  lucid  and  in  the  main 
sound,  of  the  manner  in  which  the  operation  of  these  two  quite 
different  kinds  of  competition  is  combined.  Considering  the 
wide  popularity  of  Mill’s  treatise,  it  seems  to  me  convenient 
to  begin  b}"  giving  a summary*  of  his  exposition,  slightly 

* This  summary  is  taken  partly  from  Mill’s  own  summary  in  his  Book  III. 
e.  vi.,  partly  from  passages  in  the  preceding  chapters  of  the  same  book. 


CHAP.  II  EXCHANGE  VALUE  OF  MATERIAL  PRODUCTS  183 


corrected,  and  afterwards  to  discuss  more  fully  the  points  in 
which  it  seems  to  me  to  need  qualification  and  further  de- 
velopment. 

“ The  temporary  or  market  value  of  a thing  depends  on 
“ the  demand  and  supply ; rising  as  the  demand  rises,  and 
“ falling  as  the  supply  rises.  The  demand,  however,  varies 
“ with  the  value,  being  generally  greater  when  the  thing  is 
“ cheap  than  when  it  is  dear ; and  the  value  always  adjusts 
“itself  in  such  a manner,  that  the  demand  is  equal  to  the 
“ supply. 

“ Besides  their  temporary  value,  things  have  also  a per- 
“ manent,  or,  as  it  may  be  called,  a Natural  Value,  to  which 
“ the  market  value,  after  every  variation,  always  tends  to 
“ return.” 

In  considering  the  determination  of  this  natural  value,  we 
will,  in  the  first  instance,  assume  that  each  commodity  may  be 
treated  as  the  single  result  of  an  independent  process  of  pro- 
duction h Making  this  assumption,  we  have  to  distinguish  three 
different  classes  of  commodities.  First,  there  is  a small  class  ol 
things  which — either  through  natural  scarcity  or  through 
monopoly — are  so  limited  in  quantity,  that  “ their  value  is 
“ entirely  determined  by  demand  and  supply ; save  that  their 
“ cost  of  production  (if  they  .have  any)  constitutes  a minimum 
“ below  which  they  cannot  permanently  fall.”  Secondly,  there 
is  an  important  class  of  things — chiefly  manufactured  articles 
in  which  the  main  element  of  cost  is  labour  of  some  ordinary 
kind — of  which  the  quantity  produced  may  be  increased  to  a 
practically  indefinite  extent,  without  any  consequent  material 
change  in  their  cost  of  production.  Any  such  article  may, 
accordingly,  be  regarded  as  having  at  any  given  time  a uniform 
average  cost  of  production,  independent  of  the  amount  pro- 
duced : and  this  being  so,  such  articles  tend  to  “ exchange  for 
“ one  another  in  the  ratio  of  their  cost  of  production,  or  at  what 
“ may  be  termed  their  cost  value”:  that  is,  a value  “sufficient  to 
“ repay  the  cost  of  production,  and  to  afford  besides  the  ordinary 
“ expectation  of  profit  (regard  being  had  to  the  degree  of 
“ eligibility  of  the  employment  in  other  respects).”  Hence  the 
value  of  such  things  “ does  not  depend  (except  accidentally,  and 

' The  more  complex  case  of  commodities  that  have  a joint  cost  of  production 
is  considered  later  (§  10  of  this  chapter). 


184 


POLITICAL  ECONOMY 


BOOK  :i 


“ during  the  time  necessary  for  production  to  adjust  itself)  upon 
“demand  and  supply;  on  the  contrary,  demand  and  supply 
“ depend  upon  it.  There  is  a demand  for  a certain  quantity  of 
“each  commodity  at  its  cost  value,  and  to  that  the  suppl}-  in 
“ the  long  run  endeavours  to  conform,”  through  the  desire  of 
capitalists  to  make  the  highest  possible  profits,  which  causes 
capital  to  be  continually  Avithdrawn  from  less  profitable  and 
invested  in  more  profitable  industries.  It  must  not  be  supposed 
that  this  “ cost  value  ” is  something  permanently  fixed ; it  is 
liable  to  change  continually — and  tends  generally  to  fall  some- 
what— as  industry  progresses ; and  when  such  changes  occui’, 
the  market  value  may  for  a time  deviate  markedly  from  the 
cost  value.  Still,  it  is  not  necessary,  in  order  to  make  the  value 
of  a thing  conform  approximately  to  its  cost  of  production, 
“ that  its  supply  should  actually  be  either  increased  or  di- 
“ minished. . . . The  mere  possibility  often  suffices ; the  dealeis 
“are  aware  of  what  would  happen,  and  their  mutual  com- 
“ petition  makes  them  anticipate  the  result  by  lowering  the 
“ price.” 

Finally,  there  is  a third  cla.ss  of  commodities — exemplified 
by  most  products  of  agriculture  and  mining — “ which  have,  not 
“ one,  but  several  costs  of  production ; which  can  always  he 
“increased  in  quantity  by  labour  and  capital,”  but  only  at  a 
continually  increasing  cost.  The  natural  yalue  of  such  things 
is  “ determined  by  the  cost  of  that  portion  of  the  supply  which 
“ is  produced  and  brought  to  market  at  the  greatest  expense  ” — 
so  far  as  the  expense  is  not  due  to  want  of  skill  or  to  exceptional 
ill-fortune  on  the-  producer’s  part : the  relation  of  natural  to 
market  value  being  similar  to  that  existing  in  the  case  just 
discussed. 

Further  analysis  shews  that  “cost  of  production  consists 
“ of  several  elements,  some  of  which  are  constant  and  uni- 
“ versal,  others  occasional.  The  universal  elements  of  cost 
“ of  production  are  the  wages  of  the  labour,  and  the  profits 
“ of  the  capital.  The  occasional  elements  are  taxes,  and 
“ any  extra  cost  occasioned  by  a scarcity  value  of  some  of  the 
“ requisites.” 

“ Omitting  the  occasional  elements,”  so  far  as  things  admit 
of  indefinite  increase  at  a uniform  cost,  they  “ naturally  and 
“ permanently  exchange  for  each  other  according  to  the  com- 


CHAP.  II  EXCHANGE  VALUE  OF  MATERIAL  PRODUCTS  185 


“ parative  amount  of  wages  which  must  be  paid  for  producing 
“ them,  and  the  comparative  amount  of  profits  which  must  be 
“ obtained  by  the  capitalists  who  pay  those  wages.” 

“ If  one  of  two  things  commands,  on  the  average,  a 
“greater  value  than  the  other,  the  cause  must  be  that  it  re- 
“ quires  for  its  production  either  a greater  quantity  of  labour, 
“ or  a kind  of  labour  permanently  paid  at  a higher  rate ; or 
“ that  the  capital,  or  part  of  the  capital,”  employed  in  buying 
that  labour,  must  be  invested  “ for  a longer  period ; or,  lastly, 
“ that  the  production  is  attended  with  some  circumstance  which 
“ requires  to  be  compensated  by  a permanently  higher  rate 
“ of  profit.” 

The  further  explanation  and  qualification  of  the  theory 
above  summarised,  which  I propose  to  give  in  the  present 
chapter,  may  be  conveniently  commenced  by  removing  some 
ambiguities  in  the  cardinal  terms  used  in  stating  it.  In  the 
first  place,  I ought  to  explain  that  I shall  generally  substitute 
the  term  “price” — which,  when  used  without  qualification,  will 
always  denote  “ exchange  value  in  money  ” — for  the  more 
abstract  term  “value”  which  Mill  prefers;  believing  that  the 
greater  familiarity  and  definiteness  of  the  notion  of  “ price  ” will 
render  it  easier  for  the  reader  to  follow  the  reasonings  of  this 
chapter.  This  use  of  Price  for  Value  requires  us  to  suppose 
that  the  purchasing  power  of  mone}'  relatively  to  commodities 
in  general — exclusive  of  the  one  whose  value  is  investigated — 
remains  unchanged ; but  no  material  error  is  introduced  by  this 
supposition  at  the  present  stage  of  our  discussion. 

Secondly,  the  reader  should  bear  in  mind  that  in  the  notion 
of  Cost  of  Production  we  include  the  cost  of  bringing  to  market 
the  product  in  question.  In  investigating  the  prices  of  the 
products  of  International  Trade  we  shall  also  take  note  of  the 
further  expenses  that  may  have  to  be  borne  by  the  seller  or  by 
the  purchaser  of  the  product,  in  conveying  the  equivalent  of  the 
commodity  sold  back  from  the  market  to  the  place  where  the 
seller  wishes  to  use  it.  But  this  consideration  may  be  omitted, 
without  important  error,  in  dealing  with  commodities  produced 
and  sold  within  such  a country  as  England, — to  which  in  the 
present  chapter  we  may  conveniently  confine  our  attention. 

Further,  there  is  an  ambiguity  in  the  terms  describing 
changes  in  demand,  which  requires  to  be  carefully  removed. 


186 


POLITICAL  ECONOMY 


BOOK  II 


It  seems  to  me,  as  to  Mill,  most  convenient  to  mean  by  “ increase 
of  demand  ” increase  of  the  quantity  demanded  of  an  article' : 
but  if  so,  when  we  say  (1)  that  a fall  of  value  causes  an 
“ increased  demand,”  and  also  (2)  that  “ if  the  demand  in- 
“ creases  the  value  rises,”  there  is  an  apparent  inconsistency 
which  needs  to  bo  exi'lained.  The  explanation  is  that  in 
affirming  the  first  proposition  we  are  supposing  a change  in  the 
value  of  a commodity  to  take  place  in  consequence  of  causes 
affecting  its  supply,  while  the  purchasers’  estimate  of  its  com- 
parative utility  remains  unchanged.  We  assume  that  for  any 
given  price  there  is  a certain  amount  which  purchasers  are 
willing  to  take  at  that  price ; and  that,  supposing  other  things 
unchanged,  this  amount  w'ill  be  greater  when  the  price  is  lower 
and  less  when  it  is  higher.  This  follows  from  the  doctrine, 
already  explained-,  that  the  juice  of  any  ware  tends  to  coire- 
spond  to  the  “final  utility”  of  the  total  (juantity  purchased, 
i.e.,  to  the  utility  of  the  last  additional  portion  that,  accoixling 
to  the  resultant  estimate  of  the  aggregate  of  purchirsei’s,  it  is  just 
worth  while  to  purchase  at  the  price.  In  applying  this  concep- 
tion, however,  it  must  he  borne  in  mind  that,  owing  to  the 
unequal  distribution  i>f  w’ealth,  the  same  price  represents  very 
different  degrees  of  utility  in  relation  to  different  purchasers.  For 
example,  if  the  price  of  a newspaper  were  reduced  from  'Id.  to 
Id.,  two  men,  one  rich  and  one  poor,  might  be  thereby  induced  to 
take  it  in  ; but  the  Id.  would  represent  a much  higher  estimate 
of  its  value  in  use  on  the  part  of  the  poor  man.  Thus  the 
(piantity  of  a commodity  demanded  at  any  given  price  is  the 
residt  of  a number  of  very  divei-se  estimates  of  its  final  utility 
made  under  indefinitely  varying  conditions : and  each  variation 
in  demand,  corresjxmding  to  a change  in  price,  is  generally 
a compound  effect  of  a number  of  different  readjustments  of 
these  estimates,  rendered  necessaiy  by  the  change  in  price. 
We  have,  therefore,  no  means  of  knowing  d priori  what  will 
be  the  exact  extent  of  the  variation  in  demand  for  any  given 
change  in  price,  and  we  make  no  general  assumption  with 

* Cairnes  prefers  to  measure  demand  not  by  “ quantity  of  commodity  de- 
“ manded  ” but  by  “quantity  of  purchasing  power  offered  for  it”;  and  there 
are  certainly  some  advantages  in  adopting  this  view : but,  on  the  whole,  I prefer 
Mill’s.  See  the  first  note  on  page  239. 

- See  pages  82,  83. 


CHAP.  II  EXCHANGE  VALUE  OF  MATERIAL  PRODUCTS  187 


regard  to  it.  All  that  we  assume  is  that  for  every  rise  [or  fall] 
in  the  price  of  a commodity,  other  things  remaining  the  same, 
there  will  be  a decrease  [or  increase]  in  the  amount  of  it  which 
can  be  sold  at  the  price’.  On  the  other  hand,  when  we  speak  of 
“price  rising  as  demand  rises”  we  are  contemplating  the  effect  of 
some  change  in  the  causes  of  demand,  other  than  variation  of 
price.  We  are  supposing  that  owing  to  some  alteration  in  social 
needs  or  desires,  or  in  the  supply  of  some  other  commodity,  or 
perhaps  in  the  general  wealth  of  society,  the  amount  of  the  com- 
modity in  question  demanded  at  the  old  price  has  increased. 
This  effect,  supposing  the  supply  of  the  commodity  to  remain 
unchanged,  is  commonly  expressed  by  saying  that  “ the  demand 
“ is  in  excess  of  the  supply.”  But  this  being  so,  according  to 
our  general  assumption  of  a continuous  variation  in  demand 
corresponding,  but  in  an  opposite  direction,  to  any  variation  in 
price,  there  will  be  some  higher  price  at  which  the  demand  will 
be  equal  to  the  supply ; it  is  obviously  the  interest  of  the  sellers 
to  raise  their  price  till  it  reaches  this  point,  and  the  competition 
of  the  buyers  will  enable  them  so  to  raise  it.  It  thus  appears 
that  the  phrase  “ increase  of  demand  ” is  currently  used  to  denote 
two  different  facts  : (1)  the  increase  in  quantity  demanded  which 
would  result  from  any  fall  in  price,  supposing  other  conditions 
of  demand  to  remain  unchanged ; and  (2)  an  increase  in  the 
quantity  demanded  at  a given  price,  due  to  changes  in  condi- 
tions of  demand  other  than  variation  in  price.  It  is  convenient 
to  have  two  unambiguous  terms  to  distinguish  these  two  dif- 
ferent kinds  of  change  in  demand ; and  I think  it  will  be  in 
accordance  with  usage  to  speak  of  the  former  as  an  extension  of 
demand,  and  of  the  latter  as  a t'ise  or  intensification  of  demand. 
I shall,  therefore,  always  use  these  terms  so  ; and  similarly  I shall 
use  “ reduction  ” and  “ fall  ” as  the  opposites  of  “ extension  ” and 
“ rise  ” respectively. 

‘ This  assumption,  as  Thornton  has  pointed  out,  is  not  found  to  hold  in  all 
sales  that  actually  occur ; it  may  easily  happen  that  at  a particular  time  and 
place  a moderate  change  in  the  price  of  a given  article  would  not  alter  the 
number  of  persons  willing  to  purchase  it.  None  the  less  is  the  assumption, 
1 think,  perfectly  legitimate  as  a scientific  hypothesis  for  the  purposes  of  general 
deductive  reasoning ; since  it  represents  in  a simple  form,  with  approximate 
accuracy,  the  most  important  facts  with  which  the  theory  is  concerned, — namely, 
those  of  wholesale  trade  almost  universally,  and  to  a great  extent  those  of  retail 
trade  and  other  exchanges,  so  far  as  regards  commodities  largely  dealt  in  by 
purchasers  of  various  degrees  of  wealth. 


188 


POLITICAL  ECONOMY 


BOOK  II 


It  ought  to  be  borne  in  mind  that  not  only  may  the  demand 
I’or  any  one  commodity  vary  quite  differently  from  the  demand 
for  any  other,  but  also  that  the  demand  for  the  same  com- 
modity may  vary  differentl}-  at  different  times.  In  fact,  if  we- 
could  construct  a scale  of  the  variations  in  demand  for  any 
given  commodity  that  would  result  ceteri,s  paribus  from  any 
given  series  of  variations  in  its  price,  we  should  doubtless  find 
such  a scale  continually  varying,  as  the  amount  of  wealth  in  any 
community,  the  manner  of  its  distribution,  and  social  customs 
and  fashions  change.  But  for  our  present  purpose  it  will  be 
convenient  to  assume,  where  the  contrary  is  not  expressl}' 
stated,  that  the  scale  of  demand  for  each  of  our  commodities 
remains  unaltered,  during  the  period  that  enters  into  our 
consideration. 

§ 3.  Assuming  then  that  the  price  of  any  commodity  and  the 
demand  fijr  it  vary  together  continuously  but  in  opposite  direc- 
tions according  to  a certain  scale,  it  is  evident  that  for  any 
given  quantity  of  the  article  “supplied”  or  ottered  for  sale, 
there  must  be  some  jirice  at  which  (to  use  Mill’s  phrase)  “ the 
“ equation  of  demand  and  supply  ” will  be  realised, — that  is, 
at  which  the  quantit}'  demanded  by  jjurchasers  in  general  will 
be  just  equal  to  the  given  quantity.  Hence,  if  the  quantity  of 
the  article  supplied  is  fixed  independent!}-  of  its  price,  and  has 
to  be  sold  for  any  price  that  can  be  got  for  it,  this  equation  ot 
demand  anil  supply  will  determine  the  market-price  of  the 
article ; and  in  the  case  of  an  article  whose  price  is  kept  above 
cost  value  by  the  limitation  of  its  quantity,  the  natural  or 
normal  value  will  be  similarly  determined.  But,  in  most  cases, 
we  cannot  assume  supply  to  be  independent  of  price : as  IMill 
himself  points  out,  demand  and  supply  are  frequently  equalised, 
not  by  an  extended  demand  resulting  from  cheapness,  but  by 
“ withdrawing  a part  of  the  supply.”  So  far  as  this  is  the  case, 
the  determination  of  value  is  necessarily  more  complicated  than 
Mill’s  exposition  recognises,  and  requires  a fuller  investigation 
of  the  influence  of  price  on  supply. 

In  making  this  investigation,  I shall  suppose,  in  the  fimt 
instance',  that  the  commodities  in  question  are  obtained  by 
dealers  fi'om  producers,  and  that  am'  second-hand  supply,  sent 

* The  case  of  second-hand  supply  is  discussed  in  the  concluding  section  of 
this  chapter. 


CHAP.  II  EXCHANGE  VALUE  OF  MATERIAL  PRODUCTS  189 


back  into  the  market  by  persons  who  have  purchased  for  con- 
sumption, may  be  neglected, — a supposition  which  is  actually 
true  of  almost  all  commodities  consumed  in  a single  use,  and 
approximately  true  of  many  others.  It  will  be  convenient  to 
consider  first  commodities  belonging  t<i  Mill’s  first  class,  of  which 
the  natural  no  less  than  the  market  value  is  stated  to  be 
fletermined  by  supply  and  demand.  These  are  commodities 
of  which  the  supply  is  insufficient  to  satisfy  the  whole  of  the 
demand  that  would  exist  for  them  at  their  cost  value.  MilU 
says  that  such  things  are  at  a “ scarcity  ” or  “ monopoly  ” value. 
He  thus  uses  as  convertible  two  terms  which  I find  it  necessary 
to  distinguish ; since  it  makes  an  important  difference  in  the 
determination  of  the  value  of  a scarce  article,  whether  its 
supply  is  (1)  controlled  by  a .single  seller,  or  several  sellers  who 
combining  act  as  one,  or  is  (2)  in  the  hands  of  several  sellers, 
competing  freely  with  one  another.  It  will  be  convenient  to 
use  the  term  “ monopoly  ” to  imply  the  former  state  of  things, 
and  to  call  the  latter  case  that  of  simple  “ scarcity.”  It  should 
be  observed  that  a monopolised  article  will  not  necessarily  be 
scarce : since  a man  may  control  the  sole  supply  of  any  ware 
and  yet  be  unable  to  sell  it  at  a price  exceeding  the  cost  value : 
indeed  it  may  easily  happen  that  he  has  to  sell  it  (if  at  all)  for 
a lower  price  still,  as  is  the  case  {e.g.)  with  the  authors  of  un- 
readable books.  But  we  need  not  here  concern  ourselves  with 
a monopoly  of  this  unprofitable  kind. 

§ 4.  Let  us  then  begin  by  considering  how  supply  will  be 
determined  in  the  case  of  a profitable  monopoly.  Here  it  soon 
appears  that  the  effects  of  monopoly  on  value  are  very  different 
under  different  conditions.  There  are  some  monopolised 
commodities  for  which  the  demand  is  keen,  while  the  whole 
amount  that  it  is  possible  to  produce  is  very  limited,  and  the 
additional  expense  of  production  involved  in  producing  a larger 
amount  instead  of  a smaller  is  comparatively  small.  In  the 
case  of  such  commodities,  the  decrease  in  price  required  to 
extend  the  demand  sufficiently  to  meet  any  possible  extension 
of  supply  will  never  be  so  great  as  to  make  the  total  profit  on  a 
larger  quantity  less  than  the  total  profit  on  a smaller.  If,  for 
example,  the  average  produce  of  the  Johannisberg  vineyard  were 
increased  by  one-half,  without  any  decline  in  quality,  it  would 
1 Following  Adam  Smith. 


190 


POLITICAL  ECONOMY 


BOOK  II 


be  necessary  to  lower  the  price  a little  to  get  all  the  vintage 
sold  off ; but  it  would  not  be  necessary  to  decrease  it  by  nearly 
so  much  as  one-third,  so  that  (allowing  for  the  additional 
expense  of  production)  the  net  revenue  of  the  proprietor  of 
the  vineyard  would  be  considerably  increased.  In  all  such 
cases,  then,  the  determination  of  supply  is  very  simple : since 
self-interest  will  lead  the  proprietor  of  the  commodity  to 
produce  and  offer  for  sale  as  large  an  amount  as  he  can.  In 
other  cases  the  monopolist  has  to  limit  the  supply  artificially,  in 
order  to  secure  the  highest  possible  net  profit : thus — to  take 
Mill’s  illustration — the  Dutch  East  India  Company  used,  in 
good  seasons,  to  destroy  a portion  of  the  produce  of  the  Spice 
Islands ; judging  that,  if  they  tried  to  force  a market  for  the 
whole  produce,  the  price  would  fall  so  much  that  their  net 
profit  would  be  materially  reduced.  In  cases  of  this  latter  kind 
it  is  obviously  possible  that  the  sale  of  a larger  quantity  at  a 
lower  price  may  bring  in  the  same  profit  as  the  sale  of  a smaller 
quantity  at  a higher  price : so  that  there  ma\'  be  no  economic 
reason  why  the  monopolist  should  choose  one  of  the  two 
quantities  rather  than  the  other : the  “ equation  of  supply  and 
“ demand  ” may  thus  be  established  indifferently  at  either  of 
the  two  different  values'. 

So  far  the  articles  considered  have  been  luxuries;  for  which 
the  maximum  price  obtainable  is  closely  limited  and  could  not 
exceed  an  amount  small  in  proportion  to  the  whole  resources 
of  the  purchasers.  But  it  is  quite  conceivable  that  an  article 
absolutely  necessary  to  subsistence  might  be  thus  monopolised ; 
in  which  case  the  possible  pecuniary  gain  of  the  monopolist,  on 
the  assumption  of  perfect  commei'cial  freedom,  and  ajiart  from 
legal  interference  or  the  fear  of  popular  indignation,  would  theo- 
i-etically  amount  to  the  whole  spare  wealth  of  the  region  affected 
by  the  monopoly.  In  pi-actice,  no  doubt,  the  monopolist’s  charges 
would  be  kept  far  below  this  theoretical  maximum. 

§ 5.  Let  us  now  consider  the  case  of  what  I have  called 
“ simple  scarcity  value  ” ; i.e.,  where  a commodity,  kept  through 
scarcity  above  cost  price,  is  sold  by  a number  of  persons  who  do 
not  combine.  Here,  generally  speaking,  the  amount  ot  supply 

1 For  simplicity’s  sake  I have  omitted  the  consideration  of  the  vaiying  tivu 
required  for  disposing  of  the  stock  of  a commodity,  according  to  the  price ; 
for  this  see  § 6. 


CHAi’.  II  EXCHANGE  VALUE  OF  MATERIAL  PRODUCTS  191 


will  be  practically  settled  by  the  dealers  selling  all  that  they 
can  bring  to  market.  But  it  may  happen  here — just  as  in  the 
case  of  strict  monopoly — that  if  each  individual  seller  aimed 
intelligently  at  obtaining  the  greatest  possible  profit,  and  were 
able  to  rely  on  an  equal  exercise  of  enlightened  self-regard  on 
the  part  of  all  the  rest,  each  would  artificially  limit  his  supply : 
though  the  limitations  thus  introduced  would  generally  be 
different  from  those  of  a strictly  monopolised  commodity.  Foi’ 
a point  at  which  it  would  be  the  combined  interest  of  the  sellers 
to  stop  the  supply,  if  only  each  could  rely  on  all  the  others 
doing  the  same,  would  generally  be  a point  at  which  it  would 
be  any  individual  seller’s  immediate  interest  to  add  to  his 
supply ; since  the  fall  in  the  price  of  his  commodity  caused  by 
this  addition  would  generally  be  more  than  compensated  by  the 
profit  on  the  extra  amount  that  he  would  sell ; and  thus  self- 
interest  without  concert  would  prompt  each  and  all  to  enlarge 
the  supply  until  it  reached  the  point  at  which  each  would 
immediately  lose  by  going  further.  But  the  determination  of 
this  point  has,  I conceive,  hardly  any  practical  interest' ; since 


' Merely  for  the  sake  of  illustration,  I have  worked  out  the  following 
example,  of  what  might  occur  if  the  supply  of  a commodity  were  controlled  by 
a small  number  of  persons  who  did  not  combine,  supposing  that  the  conditions 
of  demand  were  precisely  known  and  that  each  could  thoroughly  rely  on  the 
enlightened  self-interest  of  the  others.  Let  us  suppose  that  there  are  two 
springs  of  mineral  water  of  the  same  quality,  possessed  and  worked  by  two 
different  persons.  Let  us  suppose  that  the  necessary  expense  of  working  each 
spring  is  £50  a month  (including  ordinary  profit  on  the  capital  laid  out  in 
the  original  purchase)  and  that  the  expense  of  bringing  to  market  each  ad- 
ditional dozen  bottles  of  the  water  may  be  estimated  at  Is.  Let  us  suppose 
the  demand  to  be  of  such  a kind  that  500  dozen  bottles  a month  can  be 
sold  for  9s.  6d.  a dozen,  but  that  the  price  must  be  lowered  to  5s.  to  take  off 
1000  dozen  a month  ; while  if  the  supply  were  increased  further  the  price 
per  dozen  would  have  to  be  reduced  so  much  that  the  gain  on  the  additional 
amount  sold  would  not  compensate  for  the  loss  on  the  rest.  Under  these 
circumstances  it  would  obviously  be  more  profitable  for  the  two,  if  they  could 
act  in  concert,  to  produce  only  500  dozen  a month : as  in  this  case  they  would 
divide  an  extra  profit  of  £112.  10s.  (500  x 8s.  6d. -£100),  while  if  they  sold 
1000  dozen  they  would  only  divide  £100  (1000  x 4s.  - £100).  But  if  there  is  no 
concert  between  them,  it  will  not  be  the  intere.st  of  each  to  limit  his  production 
to  250  dozen : for  if  either  were  to  do  this  it  would  obviously  be  the  interest 
of  the  other  to  increase  his  own  production  to  750  dozen  ; since  by  that  means 
he  would  gain  an  extra  profit  of  £100  (750  x 4s.  - £50),  while  it  would  be  a 
matter  of  indifference — or  even  satisfaction — to  him  that  his  rival’s  extra 
profit  was  simultaneously  reduced  to  zero.  Each,  therefore,  would  extend  his 


192 


POLITICAL  ECONOMY 


BOOK  II 


in  practice  such  sellers — if  combination  were  for  some  reason 
impracticable — would  be  almost  certain  to  go  beyond  this  point, 
and  to  sell  as  much  as  they  could.  For  though  each  would 
immediately  lose  somewhat  by  so  doing,  his  o^\^l  loss  would  be 
much  less  than  the  loss  he  would  inflict  on  the  rest ; since  the 
price  would  fall  for  all  alike,  while  he  alone  would  be  partly 
compensated  by  his  profit  on  the  extra  amount  he  sold.  On 
the  other  hand,  if  one  seller  were  mistakenly  to  limit  his 
supply,  he  would  injure  himself  alone,  while  slightly  benefiting 
his  rivals.  Under  these  conditions  the  coolest  self-intere.st 
would  prefer  to  err  in  the  direction  of  extending  supply;  so 
that  each  would  find  it  better  on  the  whole  to  guard  against 
the  danger  of  such  error  on  the  part  of  others,  by  extending  his 
owm  supply : so  long,  that  is,  as  it  remained  at  a scarcity  value. 
Hence  in  the  case  of  a scarce  article  sold  under  open  competition, 
the  equation  of  .supply  and  demand  is  practically  almost  certain 
to  be  realiseil  Vjy  the  simple  process  of  selling  the  whole  sujiply 
for  what  it  will  fetch. 

§ G.  Let  us  jjass  to  consider  how  the  market-price  will  be 
determined  in  the  case  of  a commodity  of  which  the  supply  can 
be  indefinitely  increased.  We  have  seen  that  industrial  com- 
petition continually  tends  to  make  such  market-price  gi-avitate 
towards  what  Mill  calls  the  “ natural  ” or  “ cost  ” price  of  the 
commodity,  though,  through  transient  variations  in  supply  or 
demand,  it  is  continually  liable  to  deviate — up  or  down — from 
this  natural  price.  The  question  then  is,  how  the  exact  point 
which  it  at  any  time  reaches  in  its  oscillations  will  be  com- 
petitively determined ; since  it  is  clear,  as  was  said,  that  the 
quantity  offered  will  depend  on  the  price,  as  well  as  the 
(juantity  demanded  : dealers  are  continually  decided  to  sell  or 
hold  their  stocks  by  the  price  prevailing  in  the  market.  Let  us 
assume  in  the  first  instance  (1)  that  production  and  consumption 
continue  at  a uniform  rate  through  the  year,  and  (2)  that  the 
commodity  is  not  one  that  will  deteriorate  through  being  kept. 

production  to  500  dozen ; but  not  further  if  he  could  rely  entirely  on  the 
enlightened  self-interest  of  the  other. 

As  I have  said  in  the  text,  the  realisation  of  the  conditions  supposed  is 
practically  out  of  the  question  : but  the  case  has  a certain  theoretical  interest, 
as  a conceivable  transitional  link  between  monopoly  and  competition.  My 
conception  of  it  is  derived  from  Cournot  (Principes  Mathematiques  dc  la  Theorie 
des  Eichesses). 


CHAP.  II  EXCHAN(3E  VALUE  OF  MATERIAL  PRODUCTS  193 


Then,  if  we  take  any  single  dealer  who  has  a stock  of  the  com- 
modity, we  see  that  he  will  gain  by  selling  it,  unless  he  has 
reason  to  expect  that  the  price  at  some  definite  distance  of 
time  will  be  higher  than  the  present  price  by  an  amount  more 
than  sufficient  to  compensate  him  for  his  loss  of  interest  or 
profit  1 on  the  capital  locked  up  in  the  unsold  stock,  together 
with  the  expense  and  trouble  of  taking  care  of  the  goods. 
Hence,  if  we  suppose  that  all  the  dealers  have  full  information 
and  perfect  foresight,  and  that  none  of  them  would  have  to  pay 
more  than  ordinary  interest  on  borrowed  money,  we  may  infer 
that  competition  will  keep  the  price  at  the  point  at  which  there 
is  equal  expectation  of  advantage  in  selling  or  holding  back  ; 
i.e.,  at  which  any  expected  rise  in  prices  is  estimated  as  just 
sufficient  to  compensate  for  expense  and  loss  on  the  stock  kept 
back.  Thus,  so  long  as  the  price  at  any  time  is  raised  above 
cost  price,  these  hypothetical  dealers  will  sell  all  their  stocks, 
unless  they  foresee  in  the  proximate  future  a rise  in  demand 
more  than  sufficient  to  counterbalance  the  increase  of  supply* 
which  the  high  price  will  tend  to  cause.  If,  on  the  other  hand, 
the  market-price  should  fall  below  cost  price,  owing  to  a 
temporary  over-production,  the  action  of  the  dealers  in  keeping 
back  supply  will  check  the  fall  at  the  point  at  which  the  differ- 
ence between  cost  price  and  market-price  is  estimated  as  about 
equal  to  the  probable  loss  on  the  stock  kept  back,  during  the 
time  expected  to  elapse  before  the  price  rises  again  to  cost 
point.  Such  would  be  the  result  under  the  simplified  conditions 
that  we  have  supposed ; and  such  will  tend  to  be  the  result,  in 
proportion  as  these  conditions  are  approximately  realised  in 
practice.  But  actually,  of  course,  the  supply  that  is  kept  back 
in  any  market  partly  depends  on  differences  of  opinion  on  the 
part  of  different  dealers’  as  to  the  future  prospects  of  supply  (or 
demand).  It  also  depends,  to  a perhaps  greater  extent,  on 

1 Whether  the  dealer  will  require  to  be  compensated  for  loss  of  interest 
merely,  or  for  loss  of  profit,  depends  upon  the  condition  of  his  business.  If  he 
does  not  see  his  way  to  using  money  profitably  in  his  own  line  of  business, 
he  will  only  consider  that  he  has  to  be  compensated  for  loss  of  interest : but  if 
business  is  flourishing,  he  wiU  consider  that  he  could  be  earning  traders’  profit 
on  the  money  locked  up. 

® This  increase  may  be  caused  either  by  stimulating  production  within  the 
area  from  which  the  market  in  question  has  previously  been  supplied ; or  by 
extending  this  area,  and  attracting  supplies  from  more  distant  producers. 

S.  P.  E.  13 


194 


POLITICAL  ECONOMY 


BOOK  II 


differences  in  another  condition  in  which  the  theory  as  above 
given  assumed  uniformity.  We  have  .spoken  of  “ loss  of  interest  ” 
as  if  there  were  a uniform  rate  of  interest  for  all  dealers ; but  it 
commonly  happens  that  any  trading  body  includes  dealers  in 
very  different  pecuniary  circumstances,  and  some  who  Avould 
have  to  borrow  at  a higher  rate  than  others.  Hence  these 
dealers  may  gain  by  selling  off  their  goods  at  a price  at  which 
others  will  gain  by  keeping  them  back. 

It  may  be  observed  that,  under  our  hy]jothetical  conditions, 
a rise  in  the  general  rate  of  interest  will  tend  to  increase  the 
oscillations  of  market-price,  by  rendering  it  more  inexpedient  for 
dealers  to  keep  back  supply.  A similar  effect  will  be  produced 
by  any  liability  to  deterioration  in  an  unsold  commodity.  In 
an  extreme  case  the  deterioration  might  be  so  ineHtable  and 
rapid  that  it  would  never  be  the  dealer’s  interest  to  keep  any 
part  of  the  supply  longer  than  a single  day ; in  which  case  the 
yjrice  would  tend  to  be  fixed  so  that  the  day’s  demand  should 
take  off  the  day’s  supply. 

Finally,  the  same  general  principle — that  supply  will  on 
the  average  tend  to  be  held  back  to  an  extent  just  sufficient  to 
repay  the  loss  of  interest  involved  in  holding  back — will  enable 
us  to  solve  the  slightly  more  complicated  problems  presented  by 
commodities  of  which  the  supply  and  demand  are  not  approx- 
imately uniform  and  continuous.  Suppose  (e.g.)  that  an 
article  is  produced  only  in  one  part  of  the  year,  while  the 
intensity  of  the  demand  for  it  is  uniform  throughout  the  whole 
year,  as  is  the  case  with  the  chief  agricultural  products.  Here 
the  competition  of  producers  and  dealers  will  tend  to  adjust 
the  supply  actually  brought  to  market  so  as  to  keep  the  price 
throughout  the  year  at  a level  that  gradually  rises,  as  the 
time  of  completion  of  the  last  harv'est  recedes  into  the  past ; in 
order  to  compensate  for  the  interest  lost  by  keeping  produce 
unsold — apart  from  any  further  rise  or  fall  that  may  be  caused 
by  good  or  bad  expectations  of  the  coming  harvest.  But  here 
again  we  have  in  practice  to  take  account  of  differences  in  the 
knowledge,  foresight,  and  pecuniary  circumstances  of  different 
dealers;  and  also,  of  course,  of  the  complex  variations  in  supply, 
and  in  fecilities  for  conveyance,  which  a world- wide  trade  in- 
volves. 

§ 7.  So  far  I have  not  expressly  adverted  to  the  effects  of 


CHAP.  II  EXCHANGE  VALUE  OF  MATERIAL  PRODUCTS  195 


speculative  sales  and  purchases.  But  in  fact,  in  discussing  the 
problem  of  market-value  in  an  abstract  and  simplified  form, 
it  was  tacitly  assumed  that  the  legitimate  work  of  specula- 
tion, in  reducing  the  fluctuations  of  price  that  would  otherwise 
result  from  fluctuations  of  supply  and  demand,  would  be 
completely  performed  without  any  special  class  of  speculators ; 
through  the  enlightened  self-regard  of  ordinary  dealers,  prompt- 
ing them  to  hold  stocks  when  the  price  fell  and  sell  when  it 
rose.  And  of  course,  even  under  the  conditions  of  actual 
business,  this  assumption  is  largely  realised ; and,  so  far  as  this 
result  of  speculation  is  concerned,  the  only  consequence  of  the 
development  of  a special  class  of  speculators  is  that — as  in  other 
cases  of  division  of  labour — the  work  is  likely  to  be  more 
expertly  performed.  But  the  question  still  remains,  how  far 
speculation  tends  normally  to  produce  only  this  moderative 
effect.  According  to  Mill,  this  is  necessarily  the  case  so  far  as 
the  speculators  themselves  profit  by  their  operations.  He 
admits,  of  course,  that  these  have  sometimes  the  opposite  effect 
of  causing  or  aggravating  fluctuations : but  he  holds  that, 
whenever  this  happens,  the  speculators  themselves  are  the 
greatest  losers.  Thus  he  concludes  that  “ the  interest  of  the 
“ speculators  as  a body  coincides  with  the  interest  of  the 
“public”;  and  “they  can  only  fail  to  serve  the  public  interest 
“in  proportion  as  they  miss  their  own”'. 

If  we  exclude  the  supposition  of  monopoly  effected  by  com- 
bination among  the  speculators,  this  conclusion  seems  to  me  in 
the  main  sound,  at  least  so  far  as  markets  for  material  products* 
are  concerned ; since  those  who  purchase  these  products  for  use 
generally  consider  themselves  as  good  judges  of  their  quality  as 
the  speculators  can  be,  and  are  not  likely  to  be  deluded  into 
buying  bad  or  useless  wares  through  any  operations  of  the  latter. 

' Political  Ecoiiomy,  Book  IV.  c.  ii.  § 5. 

^ If  the  reasoning  is  intended  to  apply  to  actual  markets  for  securities,  it 
involves  the  important  error  of  neglecting  the  influence  exercised  by  the  example 
of  the  speculators  on  a public  conscious  of  its  ignorance  of  the  articles  purchased. 
In  such  markets  it  often  happens  that  artificial  fluctuations  in  the  values  of 
sound  securities,  and  even  artificial  elevations  of  the  prices  of  worthless  ones, 
when  once  started  by  speculative  sales  and  purchases,  are  carried  considerably 
further  by  the  blind  imitation  of  bond  fide  investors ; and  so  become  a source  of 
profit  to  the  speculators  who  are  able  to  sell  at  the  inflated,  or  buy  at  the 
lowered,  rates  which  they  have  thus  indirectly  caused. 


13—2 


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POLITICAL  ECONOMY 


BOOK  II 


But  even  with  these  limitations  Mill’s  doctrine  is  not  altogether 
true ; since  so  far  as  the  changes  in  value  which  the  speculator 
foresees  and  profits  by  are  not  alternations  but  comparatively 
permanent  steps  in  one  direction  or  the  other,  his  gains 
are  often  made  at  the  expense  of  the  public;  inasmuch  as 
his  operations  do  not  render  prices  more  stable,  but  merely 
antedate  the  rise  or  postpone  the  fall  in  price  that  would  have 
occurred  without  them. 

If,  however,  the  possibility  of  combination  be  admitted. 
Mill’s  reasoning  obviously  fails  as  regards  all  commodities  for 
which  the  demand  diminishes  but  slightly  as  the  price  rises,  so 
that  (within  the  limits  that  we  have  practically  to  consider) 
the  total  price  of  the  amount  that  can  be  sold  at  each  rate 
continually  increases  as  the  amount  itself  diminishes.  In  the 
case  of  all  such  commodities  it  is  quite  possible  for  a combina- 
tion of  dealers,  by  buying  up  the  whole  or  a great  part  of  the 
stock  in  the  market,  to  gain,  through  the  high  price  obtained 
for  a portion  of  what  they  have  engrossed,  more  than  enough  to 
compensate  them  for  any  loss  on  the  remainder.  Food  and 
other  necessaries  of  life,  as  Mill  himself  explains,  are  commodi- 
ties of  this  class.  There  is  no  doubt  (e.g.)  that  a combination 
to  raise  the  price  of  corn  might  be  a source  of  great  profit  at 
the  public  expense,  if  only  the  combining  dealers  could  secure  a 
sufficient  hold  of  the  stock  in  the  market,  and  if  an  outburst  of 
public  indignation  against  such  “ forestalling  and  regrating  ” 
did  not  interfere  with  the  operation^ 

§ 8.  Let  us  now  examine  more  closely  the  determination 
of  “ natural  ” or  “ cost  ” price.  Mill  and  other  economists  of  the 
Ricardian  school  usually  speak  as  if  this  was  determined  in- 
dependently of  the  demand  for  the  commodity : but  it  is  clear 
that  this  cannot  be  the  case  with  commodities  of  Mill’s  third 
class,  which  can  only  be  increased  at  a continually  increasing 
cost.  Mill  says  that  the  natural  value  in  such  cases  is  de- 
termined “ by  the  cost  of  production  of  the  portion  of  the  supply 

* The  famous  “ gold  ring  ” in  New  York  in  1869  is  a striking  instance  of  a 
successful  combination  of  this  kind : for,  as  ail  wholesale  trade  was  carried 
on  upon  a gold  basis,  the  metal  was  indispensable  to  solvency  though  not  to 
life ; while  as  the  ordinary  currency  consisted  of  inconvertible  paper,  the 
amount  of  gold  easily  obtainable  was  small  enough  to  admit  of  being  mono- 
polised. 


CHAP,  n EXCHANGE  VALUE  OF  MATEKIAL  PRODUCTS  197 


which  is  produced  and  brought  to  market  at  the  greatest 
expense  but,  obviously,  this  cost  is  only  determined  when  the 
whole  amount  that  it  is  the  producers’  interest  to  produce  is 
determined ; and  this,  by  Mill’s  own  account,  must  depend  on 
the  demand.  It  is  evident,  therefore,  that  the  cost  price  of 
commodities  of  this  class  depends  on  the  conditions  of  pro- 
duction and  demand  taken  together : it  is  the  price  which  would 
just  remunerate  the  producers  of  the  most  (necessarily*)  costly 
portion  of  the  whole  amount  demanded  at  that  price.  Com- 
petition will  obviously  tend  to  cause  an  extension  of  the  supply 
until  the  price  is  brought  down  to  this  point ; and,  obviously, 
it  cannot  tend^ — ^except  through  transient  error — to  cause  any 
further  extension.  For,  after  this  point  has  been  reached,  any 
further  increase  of  average  supply  would  involve  an  increased 
cost  of  production  of  the  most  costly  portion  of  the  supply ; 
while  the  extension  of  demand  necessary  to  take  off  the  in- 
creased supply  would  involve  a decreased  price ; so  that  the 
producers  would  lose  doubly. 

It  remains  to  ask  whether  there  is,  as  Mill  holds,  a “ large  ” 
class  of  commodities  which  may  be  properly  regarded  as  having 
a cost  of  production  independent  of  the  quantity  from  time  to 
time  demanded  and  supplied.  I think  it  probable  that  there 
is  a large  class  in  reference  to  which  such  an  assumption  would 
not  involve  any  very  material  error : but  it  can  only  be  through 
an  accidental  balance  of  diverse  effects  that  changes  in  the 
demand  for  a commodity  tend  to  leave  its  cost  of  production 
altogether  unaltered.  This  will  appear  when  we  look  more 
closely  at  the  elements  of  this  cost.  The  “ universal  elements,” 
as  Mill  says,  are  wages  and  profits : the  occasional  elements, 
taxes  and  any  extra  cost  occasioned  by  the  scarcity  value  of 
some  of  the  requisites.  Omitting  taxes,  it  is  clear  that  when 
any  instrument  or  material  required,  directly  or  indirectly,  for 
the  production  of  an  article  is  so  limited  in  supply  as  to  have 
a scarcity  value,  an  intensified  demand  for  the  product  will 
tend  to  cause  a rise  in  the  price  of  the  requisite  and  con- 
sequently a rise — of  course  proportionally  smaller — in  the  price 
of  the  product.  And  this  result  must  also  tend  to  follow  when 
the  requisite  belongs  to  Mill’s  third  class  of  commodities  which 

^ I mean  by  “ necessarily”  that  the  extra  cost  is  not  due  to  want  of  average 
skill  or  good  fortune  on  the  producers’  part. 


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we  have  just  been  considering:  for  (as  we  have  just  seen)  a 
rise  of  demand  tends  to  cause  an  increase  in  what  we  may  call 
— after  Jevons — their  “ final  ” cost  of  production^  and,  therefore, 
in  their  “ natural  ” price.  And  as  this  third  class  includes 
“ generally  all  the  rude  produce  of  the  earth,”  it  would  seem 
that  this  action  of  demand  on  price  must  affect  everything 
made  out  of  this  rude  produce, — that  is,  almost  all  the  products 
of  industry. 

There  are,  no  doubt,  many  manufactured  articles  in  whose 
cost  of  production  the  raw  produce  required  directly  or  indirectly 
constitutes  so  small  an  item  that  the  tendency  of  a rise  in  the 
demand  for  the  manufactured  product  to  increase  this  item  may 
be  neglected  without  material  error.  In  the  case  of  such 
products,  then,  we  need  only  consider  whether  changes  in 
demand  tend  to  affect  the  “ universal  elements  ” of  cost  of  pro- 
duction ; which,  according  to  Mill’s  analysis,  are  “ wages  and 
“ profits  ” — including  the  profits  of  the  capitalist  who  finally 
brings  the  ware  to  market,  as  well  as  those  of  other  capitalists 
whom  he  reimburses  in  his  payments  for  machinery-,  &c.  To 
this  Cairnes^  has  forcibly  objected  that  “ cost  of  production  ” 
ought  to  mean  the  “ sacrifices  undergone  by  producers,”  and  that 
Mill’s  use  of  the  term  “ confounds  things  ” so  “ profoundly  op- 
“ posed  to  each  other  as  cost  and  the  reward  of  cost  ” ; and  it  is 
certainly  important  to  draw  attention  to  the  difference  between 
the  amount  of  efforts  and  sacrifices  involved  in  production,  and 
the  amount  of  remuneration  which  these  efforts  and  sacrifices 
obtain.  But  in  order  to  orivc  meaning  to  Cairnes’s  own  statement 
that,  if  competition  be  perfect,  " commodities  will  exchange  in 
“proportion  to  their  costs  of  production,”  we  require  a common 
measure  of  these  efforts  and  sacrifices^ ; and  1 conceive  that  this 
common  measure  can  only  be  found  in  their  price.  For  suppose 

* That  is,  the  cost  of  production  of  the  costliest  portion. 

- Mill  suggests  (III.  c.  iv.  §,  -5)  this  extension  of  the  notion  of  “ cost  of 
“ production  ” though  he  does  not  exactly  adopt  it.  It  may  seem  paradoxical  to 
include  in  cost  of  production  profits  that  are  not  yet  realised  : but  the  paradox 
disappears  when  we  consider  that  it  is  not  the  actual  profit,  but  the  expectation 
of  profit,  which — ceteris  paribus — determines  the  flow  of  capital  to  one  industry 
rather  than  another ; and  which  is  thus  the  efficient  cause  of  the  variatidns  in 
supply  which  raise  or  lower  the  market-price. 

“ Some  Leading  Principles,  Part  I.  c.  iii. 

■*  We  clearly  cannot  definitely  think  of  anything  being  “in  proportion  to” 
an  aggregate  of  incommeusurables. 


CHAP.  II  EXCHANGE  VALUE  OF  MA  ERIAL  PRODUCTS  199 


{e.g.)  that,  other  things  remaining  the  same,  there  is  a general 
fall  in  the  price  paid  for  the  use  of  capital : industrial  competition 
must  certainly  tend  to  reduce  proportionally  the  price  of  com- 
modities whose  production  requires  much  capital:  and  similarly 
if  the  price  of  any  particular  kind  of  labour  falls  relatively 
to  any  other. 

If,  however,  we  hold  with  Mill  that  cost  of  production  has 
to  be  estimated  in  terms  of  re7nimeration  and  not  of  sacrifice, 
the  statement  that  commodities  tend  to  “ exchange  for  one 
“ another  in  the  ratio  of  their  cost  of  production  ” must  be 
admitted  to  give  only  an  incomplete  account  of  the  manner  in 
which  their  “ natural  ” value  is  determined.  It  analyses  the 
total  value  of  any  product  into  the  partial  values  of  which  it  is 
compounded,  chiefly  the  values  of  the  services  of  different 
labourers  and  capitalists ; but  it  does  not  explain  the  deter- 
mination of  these  partial  values.  Indeed  without  further 
explanation  the  proposition  might  be  interpreted  as  an  in- 
significant truism  ; since,  in  a certain  sense,  as  Cairnes  pointedly 
observes,  wares  must  always  exchange  in  the  exact  ratio  of  their 
costs  of  production : as  what  remains  over  of  the  price  of  any 
ware,  after  reimbursing  outlay,  is  the  actual  profit  of  the 
capitalist  who  finally  brings  the  ware  to  market.  This,  of 
course,  is  not  Mill’s  meaning;  by  the  rates  of  wages  and  profits 
that  enter  into  the  determination  of  natural  value,  he  means 
the  normal  rates  to  which,  under  the  influence  of  industrial 
competition,  the  wages  and  jirofits  of  any  industry  tend  to 
approximate.  How  these  normal  rates  are  determined  is  a 
question  which  I shall  examine  more  fully  hereafter  * : here 
I am  chiefly  concerned  to  point  out  that  they  cannot  be 
assumed  to  be  altogether  independent  of  the  demand  for 
the  product.  Let  us  take  first  the  case  of  wages.  It  is 
no  doubt  natural  to  suppose,  that  under  a system  of  perfectly 
free  competition  no  known  differences  in  the  reward  of 
labour  could  be  permanently  maintained  except  such  as  are 
required  to  remunerate  differences  in  the  efforts  and  sacrifices 
made  by  the  labourers ; and  many  of  the  disciples  of  Adam 
Smith  have  followed  their  master  in  making  this  general 
assumption^.  But  Mill  has  pointed  out,  in  a noteworthy 

1 See  c.  ix.  of  this  book. 

- Cf.  Wealth  of  Nations,  c.  x.,  first  paragraph. 


200 


POLITICAL  ECONOMY 


BOOi  11 


passage*,  the  conclusions  of  which  Caimes  has  adopted  and 
developed,  that  there  are  important  differences  in  normal 
wages,  which  are  due  to  relative  scarcities  of  various  kinds : 
chiefly  to  scarcities  arising  from  the  unequal  distribution  of 
wealth,  which  limits  the  power  of  performing  certain  kinds  of 
services  to  the  minority  of  persons  whose  parents  have  been 
able  to  afford  the  expense  of  prolonged  training  and  sustenance 
for  their  children.  The  freest  competition  has  not  in  itself  any 
tendency  to  remove  these  scarcities,  unless  the  present  in- 
equalities in  the  distribution  of  wealth  are  first  removed : and 
it  seems  clear  that  so  far  as  the  labour  of  any  social  grade 
above  the  lowest  is  thus  purchased  at  a price  more  than 
sufficient  to  compensate,  with  interest,  for  the  above-mentioned 
outlay  on  prolonged  training  and  sustenance,  it  must  be  classed 
among  the  requisites  of  production  that  have  scarcity  values ; 
which,  as  we  have  seen,  tend  to  vary  with  the  demand  for  the 
product 

Let  us  now  examine  how  the  matter  stands  ivith  the  other 
element  of  cost  of  production,  profit.  In  Caimes’s  view,  noimal 
profits — unlike  normal  wages — may  be  rightly  assumed  to  be 
independent  of  demand.  “ The  competition  of  capital,”  he 
says,  “ being  effective  over  the  entire  industry  of  each  commer- 
“ cial  country,  it  follows  that  so  much  of  the  value  of  com- 
“ modifies  as  goes  to  remunerate  the  capitalists’  sacrifice  will 
“ throughout  the  range  of  domestic  industry  ” be  proportioned 
to  that  sacrifice.  This  statement,  however,  seems  to  me  to 
need  restriction  in  more  than  one  respect.  In  the  first  place, 

’ Political  Economy,  Book  II.  c.  xiv.  § 2. 

- The  case  of  the  lowest  grade  of  labour  is  more  doubtful : see  c.  viii.  § 5 
of  this  Book.  It  should  be  observed  that  this  division  of  society  into  grades, 
within  which  industrial  competition  is  supposed  to  be  perfect,  and  between 
which  it  is  supposed  non-existent,  does  not  correspond  precisel}'  to  the  facts 
of  modern  industrial  communities ; but  it  corresponds  to  these  facts  more 
closely  than  the  older  hypothesis  of  generally’  effective  competition.  Eicardo 
(Principles,  c.  i.  § 2)  avoids  the  conclusions  above  given  by  assuming  that  the 
differences  in  the  remuneration  of  different  kinds  of  labour  are  fixed  and  stable ; 
in  which  case  they  would  of  course  be  independent  of  changes  in  demand.  “The 
“estimation,”  he  says,  “in  which  different  qualities  of  labour  are  held,  comes 
“ soon  to  be  adjusted  in  the  market  with  sufficient  precision  for  all  practical 
“ purposes... the  scale,  when  once  formed,  is  liable  to  little  variation.”  In  any 
practical  application  of  the  theory  of  value  the  extent  to  which  such  fixity  is 
actually  maintained  by  custom  should  be  carefully  noted  ; but  to  assume  fixitj' 
as  normal  is  obviously  inconsistent  with  the  hypothesis  of  perfect  competition. 


CHAP.  II  EXCHANGE  VALUE  OE  MATERIAL  PRODUCTS 


201 


it  must  be  borne  in  mind,  in  all  discussions  of  industrial 
competition,  ibat  the  profits  of  private  manufacturers  and 
traders  are  not  published  in  statistical  tables  open  to  the 
inspection  of  all  persons  desirous  of  employing  capital.  The 
most  observant  man  of  business  can  usually  attain  only  a rough 
approximation  to  the  truth,  in  calculating  the  profits  made  in 
other  industries  and  districts ; and  hence  the  equalising  force 
of  competition  can  only  be  assumed  to  act  strongly  and  cer- 
tainly upon  industries  in  which  profits  are  either  considerably 
above  or  considerably  below  the  average.  Within  a somewhat 
broad  margin  on  either  side  of  the  average  its  operation  cannot 
but  be  vague  and  feeble ; and  hence  the  normal  cost  of  pro- 
duction that  regulates  supply  must  be  conceived  as  having  a 
similar  indefiniteness. 

But  Cairnes’s  statement  involves  a more  fundamental  theo- 
retical difficulty.  He  appears  to  assume — with  Mill  and  others 
— that  the  rate  not  only  of  interest  but  of  that  other  element 
of  profit  which  I have  called  “ wages  of  management  ” must 
tend  to  be  the  same  not  only  for  capitals  of  the  same  amount, 
but  even  for  capitals  of  different  amount.  But  this  assumption 
is  hardly  reconcileable  with  the  proposition  before  quoted,  that 
the  remuneration  of  the  (employing)  capitalist  tends  to  be 
proportioned  to  his  sacrifice ; since  there  seems  no  general 
ground  for  assuming  that  the  trouble  or  other  sacrifice  involved 
in  the  employment  of  capital  tends  to  be  exactly  proportioned 
to  the  amount  of  capital  employed.  I think’  it  probable, 
indeed,  that  the  average  rate  of  employers’  profit  tends,  for  the 
most  part,  to  be  not  cognisably  less  on  large  than  it  is  on  small 
capitals;  chiefly  because  large  capitalists  willing  to  manage 
their  own  capital  have  important  advantages  in  industrial 
competition.  But  I know  no  ground  for  supposing  this  to  be 
uniformly  the  case  in  all  industries : and  so  far  as  increased 
demand  for  products  increases  the  scale  of  pioduction  in  any 
industry — as  is  ordinarily  the  case  in  manufactures — it  is  at 
least  not  improbable  that  the  employers  who  thus  increase  their 
capital  may  be  ultimately  forced  by  industrial  competition  to 
submit  to  a lowered  proportional  rate  of  profit  per  cent,  of  capital. 

And  there  is  another  and  more  obvious  way  in  which  the 

’ The  grounds  for  this  opinion  will  be  more  fully  discussed  in  c.  ix.  § 3 
of  this  Book. 


202 


POLITICAL  ECONOMY 


BOOK  II 


increase  of  production  caused  by  a rise  in  demand  ivill  tend  to 
modify  the  cost  of  production ; namely,  through  the  “tendency  of 
“ every  extension  of  the  market  to  improve  the  processes  of  pro- 
“ duction  ” which  Mill  notices  later,  in  speaking  of  international 
trade.  He  remarks  very  justly*  that  “a  countr}'  which  produces 
“ for  a larger  market  than  its  own  can  introduce  a more  extended 
“ division  of  labour,  can  make  greater  use  of  machiner}',  and  is 
“ more  likely  to  make  inventions  and  improvements  in  the 
“ processes  of  production  ” : and  of  course  the  statement  applies 
equally  where  the  market  for  any  commodity  within  a country 
receives  a material  extension.  The  consequent  diminution  in 
cost  of  production  will  of  course  be  very  different  in  different 
cases:  but  we  must  recognise  that  any  important  rise  in  demand 
has  a general  tendency  to  cause  such  diminution  I 

§ 9.  To  sum  up  ; the  Ricardian  theory  of  the  determination 
of  Value  by  Cost  of  Production  appeal's  to  me  incontrovertible, 
at  least  as  applied  to  modern  civilised  communities,  if  it  is 
understood  in  a broad  and  vague  sense ; i.e.,  if  it  is  understood 
merely  to  affirm  that  industrial  competition  is  a force  constantly 
acting  in  the  direction  of  equalising  the  remunerations  of  pro- 
ducers of  the  same  class  in  different  departments  of  industry, 
by  increasing  the  supply — and  so  lowering  the  price — of  com- 
modities of  Avhich  the  producers  are  knoAvn  to  be  receiving 
remunerations  above  the  average  of  their  res2jective  classes, 
and  similarly  diminishing  the  supply  and  raising  the  price  of 
the  jiroducts  of  less  jjrofitable  industries.  But  in  the  more 
exact  and  definite  form  in  Avhich  the  theor}'  is  stated  e\  en  b\' 
Mill,  it  ajjpears  to  me  ojjen  to  grave  objections.  It  is  the  least 
of  these  objections  that  the  sujipositions  made  are  too  simple 
and  uniform  to  corre.sjiond  closely  to  the  facts ; defects  of  this 
kind  beset  all  hyjiotheses  framed  for  deductiA'e  reasoning  on 
social  phenomena,  and  all  that  we  can  do  to  remedy  them  is  to 
note  carefully  the  errors  that  thus  come  in  and  make  a rough 
allowance  for  them.  Of  this  nature  is  the  error  before  jAointed 
out  in  the  siqqAosition  that  industrial  competition  tends  to 

1 Book  III.  c.  xvii.  g 5. 

- It  does  not  follow  from  this  that  a fall  in  demand  will  have  a similar 
tendency  to  increase  the  cost  of  production : in  most  cases  the  effect  of  such  a 
fall  would,  I conceive,  rather  be  to  diminish  the  number  of  separate  establish- 
ments in  which  the  branch  of  production  in  question  was  carried  on. 


CHAP.  II  EXCHANGE  VALUE  OF  MATERIAL  PRODUCTS  203 


establish  a definite  normal  rate  of  profit  in  each  industry,  even 
when  the  statement  is  limited  to  capitals  of  about  the  same 
amount.  As  I have  said,  it  is  true  that  industrial  competition 
tends  to  produce  this  result ; but  in  admitting  this  we  ought  to 
note  how  much  the  mutual  knowledge  of  profits  actually  ob- 
tainable by  producers  falls  short  of  the  mutual  knowledge  of 
prices  actually  obtainable  by  dealers  in  a tolerably  well- 
organised  market  of  material  products ; and  how  in  conse- 
quence the  tendency  to  a normal  rate  of  profits  begins  to  act 
feebly  and  vaguely,  at  a considerable  interval  from  the  attain- 
ment of  the  supposed  definite  result.  In  the  case  of  wages  this 
particular  source  of  error  is  of  less  importance,  since  the  actual 
rate  of  wages  in  any  industry  is  easier  to  ascertain  than  the 
actual  rate  of  profits ; but  here,  on  the  other  hand,  the  propor- 
tion between  remuneration  and  sacrifice  that  industrial  com- 
petition tends  to  establish  is  actually  subject  to  more  serious 
retardation  and  interference  from  different  causes ; especially 
from  the  difficulty  of  attracting  labour  from  district  to  district 
and  from  industry  to  industry,  and  the  different  degrees  in 
which  custom  and  combination  together  operate  in  keeping 
wages  up  (or  down)  in  different  employments.  So  far,  however, 
as  the  operation  of  these  causes  is  independent  of  the  demand 
for  the  product  of  the  labour  remunerated,  they  are  more  im- 
portant in  the  theory  of  distribution  than  in  the  general  theory 
of  exchange;  since  they  do  not  necessarily  prevent  the  establish- 
ment, at  any  given  time  and  place,  of  a normal  cost  of  produc- 
tion towards  which  the  market-price  tends  to  return  after  any 
variation  temporaiily  caused  by  changes  in  demand  or  acciden- 
tal excesses  or  deficiencies  in  supply.  But  so  far  as  differences 
of  wages  are  admittedly  due  to  causes  of  which  the  operation  is 
necessarily  affected  by  variations  in  the  demand  for  different 
kinds  of  labour — and  we  have  seen  that  this  is  the  case  accord- 
ing to  Mill’s  own  view  of  industrial  grades — it  is  manifestly 
illegitimate  to  regard  cost  of  production  as  independent  of 
demand.  And  this  is  equally  the  case,  so  far-  as  increased 
aggregate  production  of  a commodity  tends  to  economy  in  the 
amount  of  labour  required  for  a given  amount  of  product ; and 
so  far,  on  the  other  hand,  as  it  tends  to  raise  the  price  of 
the  “ raw  produce  ” that  it  employs,  directly  or  indirectly,  as 
material.  Hence  it  appears  to  me  unscientific  to  say  broadly 


204 


POLITICAL  ECONOMY 


BOOK  II 


that  “ the  value  of  things  which  can  be  increased  in  quantity  at 
“ pleasure  does  not  depend  (except  accidentally,  and  during  the 
“ time  necessary  for  production  to  adapt  itself)  upon  demand.” 
Even  where  the  cost  of  production  can  be  assumed  to  be 
approximately  the  same  for  all  producers,  we  should  represent 
the  facts  more  exactly  by  supposing  that  in  any  given  social 
and  industrial  conditions  this  cost  of  production  will  vary  %vith 
the  amount  produced,  just  as  we  suppose  that  the  amount 
demanded  will  vary  with  the  price;  though  the  former  variation 
will  no  doubt  be  generally  much  slighter  than  the  latter.  The 
proposition,  therefore,  that  the  natural  price  of  any  product  of 
this  kind  is  equal  to  its  cost  of  production,  is  certainly  a true 
statement — on  the  assumption  and  with  the  qualifications 
already  explained — but  it  is  in  almost  all  cases  theoretically 
insufficient.  Our  formula  must  rather  be,  that  it  is  a price  at 
which  the  amount  demanded  is  equal  to  the  amount  that 
would  permanently  be  produced  at  a cost  equal  to  the  price, 
supposing  social  and  industrial  conditions  unchanged  h 

And  in  the  case  of  products  of  Mill’s  third  class,  of  which 
the  co.st  of  production  must  be  taken  to  be  different  for  different 
portions  of  the  aggregate  amount  produced,  and  to  increase 
steadily  as  the  aggregate  increases,  the  formula  becomes  some- 
what more  complicated  ; the  natural  price  must  be  stated  to  be 
that  at  which  adequate  remuneration  could  just  be  afforded  to 
the  producers  of  the  costliest  portion  that  it  would  be  per- 
manently worth  while  to  produce,  if  social  and  industrial 
conditions  remained  unaltered. 

We  are  thus  enabled  to  shew  the  close  relation,  which  Mill’s 
phraseology  certainly  tends  to  obscure,  between  the  competitive 
determination  of  Natural  Price,  and  that  of  Market  Price. 
Market  Price — supposing  it  definite  and  single  as  it  would  be 
in  a perfect  market — was  explained  to  be  the  price  at  which 
the  demand  for  the  jiroduct  in  question  would  be  sufficiently 
extensive  to  take  off  the  actual  supply  (allo\\dng  for  .the 
possible  withdrawal  of  a part  of  this  supply  in  view  of  a 
prospective  rise  in  demand  or  diminution  of  supply) ; while 
Natural  Price  (as  we  have  seen)  is  similarly  determined  as 
the  price  at  which  the  demand  would  be  sufficiently  extensive 

1 It  is  quite  conceivable  that,  as  in  the  case  discussed  in  § 4,  there  may  be 
several  such  prices. 


CHAP.  II  EXCHANGE  VALUE  OF  MATERIAL  PRODUCTS 


205 


to  take  off  the  supply  which,  assuming  social  and  industrial 
conditions  unchanged,  might  permanently'  be  expected  to  be 
produced  at  that  price.  There  is,  in  fact,  no  sharp  line  to  be 
drawn  between  the  determinants  in  the  two  cases ; prospective 
changes  in  cost  of  production,  if  their  effect  may  be  expected  to 
be  rapid  and  considerable,  will  enter  into  the  calculations  of 
dealers  that  influence  market-prices  through  supply,  as  much  as 
any  other  conditions  of  prospective  supply  or  demand. 

§ 10.  The  dependence  of  Value  on  Cost  of  Production  and 
Demand  together  is  further  exemplified  by  the  numerous  cases 
in  which  two  or  more  products  are  jointly  produced  by  the  same 
industrial  process.  “ For  example,  coke  and  coal-gas  are  both 
“ produced  from  the  same  material,  and  by  the  same  operation. 
“ In  a more  partial  sense,  mutton  and  wool  are  an  example ; 
“ beef,  hides,  and  tallow,”  &c.  The  values  of  the  articles  thus 
industrially  connected  are,  as  Mill  himself  explains  ^ determined 
by  cost  of  production  and  demand  conjointly  in  a complicated 
manner,  which  varies  with  the  nature  and  extent  of  the  con- 
nexion. All  that  can  be  stated  generally  is  that  the  prices  and 
amounts  of  any  such  set  of  products,  under  the  action  of  in- 
dustrial competition,  will  tend  to  conform  to  two  conditions. 
Firstly,  the  prices  will  tend  to  be  such  that  the  sum  of  them  will 
repay  their  joint  cost  of  production,  including  normal  profit®  on 
the  capital  employed  : secondly,  the  amounts  will  tend  to  be  such 
that  the  demand  for  each  article  at  the  price  will  just  about 
take  off  the  supply*.  It  should  be  observed  that  in  the 
examples  above  given  the  products  are  so  connected  that 
their  amounts  must  increase  or  decrease  together:  but  often 
they  are  wholly  or  to  some  extent  alternatives,  so  that  an 
increase  in  the  production  of  one  will,  in  the  first  instance 

1 “ Permanently” — because  from  the  risk  of  starting  a new  business,  especi- 
ally in  industries  where  production  is  on  a large  scale,  from  the  difficulty  of 
removing  capital  durably  invested  in  forms  specially  adapted  to  particular  in- 
dustries, and  other  similar  causes,  market-prices,  however  perfect  competition 
became,  would  often  be  liable  to  remain  long  above  or  below  their  corresponding 
natural  prices. 

2 Book  III.  c.  xvi. 

* By  “ normal  profit  ” I mean  “ profit  not  much  above  or  below  the  average 
“profit  to  be  obtained  on  equal  amounts  of  capital  in  other  industries  that  do 
“ not  impose  more  sacrifices  or  require  scarcer  qualifications.” 

■*  Here  again  it  is  possible  that  these  conditions  may  be  equally  satisfied  by 
several  different  adjustments  of  prices  and  amounts. 


206 


POLITICAL  ECONOMY 


BOOK  ir 


at  least,  be  attended  by  a diminution  in  the  production  of 
the  other.  For  instance,  chickens  and  eggs  are  connected  in 
this  latter  way.  In  the  former  case  any  rise  in  the  demand  for 
one  only  of  the  connected  products,  since  by  raising  the  joint 
price  it  will  increase  the  supply  of  both,  must  obviously  tend 
to  lower  the  price  of  the  other ; as  the  sale  of  this  latter  will 
have  to  be  extended  without  any  rise  in  the  demand  for  it. 
In  the  second  case,  on  the  other  hand,  any  sudden  rise  in  the 
demand  for  either  product  is  likely  to  raise  the  price  of  the 
other  temporarily — and  perhaps  permanently — by  causing 
restriction  of  its  supply.  A more  indirect  connexion  of  this 
second  class  is  that  which  subsists  between  commodities  of 
which  the  production  requires  the  same  kind  of  raw  or 
auxiliary  material.  In  all  such  cases  a rise  in  the  demand 
for  one  of  the  connected  commodities  will  in  the  first  instance 
tend  to  increase  the  cost  of  production  of  the  other;  but 
whether  this  increase  will  tend  to  be  sustained  will  depend  on 
whether  the  production  of  the  material  in  question  becomes 
more  costly,  in  whole  or  in  part,  by  being  increased  in 
amount. 

Another  case  that  may  be  classed  under  the  head  of  joint 
production  is  that  in  which  different  commodities  are  produced 
by  the  same  labourers,  but  by  industrial  processes  altogether 
separate : as  when  cultivators  of  the  soil  sujjplement  their 
agricultural  earnings  by  domestic  manufactures  in  winter.  The 
primary  tendency  of  industrial  competition  is  to  keep  the  total 
remuneration  of  any  class  of  labourere  approximately  equal  to 
that  of  any  other  class  whose  labour  does  not  entail  materially 
more  sacrifices,  or  require  scarcer  qualifications  or  more  costly 
jtreparation.  Hence,  in  the  case  which  we  are  consideiing,  it 
affects  primarily  the  aggregate  price  of  the  labourer’s  difterent 
jiroducts,  just  as  if  they  wei’e  produced  by  the  same  industrial 
]»rocess ; and  it  acts  directly  on  the  price  of  each  separate  kind 
of  product,  only  so  firr  as  the  producers  have  competing  oppor- 
tunities of  employing  profitably  the  particular  portion  of  work- 
time which  this  product  absorbs.  But  when  a man  has  two 
occupations,  of  which  one  is  the  main  source  of  his  income,  while 
the  other  is  merely  taken  up  to  fill  the  fragments  of  time  left 
by  the  former,  his  opportunities  of  employing  these  fi-agments 
profitably  are  likely  to  be  somewhat  restricted : so  that,  if  the 


CHAP.  II  EXCHANGE  VALUE  OF  MATERIAL  PRODUCTS  207 


supply  of  what  is  produced  in  these  leavings  of  work-time  is 
sufficient  to  meet  the  demand  at  a price  below  what  industrial 
competition  under  ordinary  conditions  would  require,  the  price 
of  the  product  is  likely  to  be  determined  mainly  by  the  relations 
of  quantity  and  demand, — so  long  as  it  is  enough  to  induce  the 
labourer  to  prefer  work  to  leisure. 

Finally,  it  should  be  noticed  that  the  values  of  two  com- 
modities may  be  connected  through  Demand,  as  well  as  through 
Supply  ; so  far  as  one  of  the  two  is,  either  in  ordinary  con- 
sumption or  in  any  kind  of  production,  a substitute  for  the 
other.  Thus  {e.g.)  an  extension  in  the  demand  for  mutton,  due 
to  a fall  in  its  value,  would  have  the  effect  of  restricting  the 
demand  for  beef,  and  would  tend  thereby  to  affect  its  cost  of 
production  and  value.  Indeed  this  kind  of  connexion  may  be 
said  to  subsist,  in  an  attenuated  form,  among  commodities 
generally ; since  such  an  extension  in  the  demand  for  any  one 
commodity  as  makes  the  aggregate  price  paid  for  it  a larger 
share  of  the  income  of  the  community,  tends  pro  tanto  to 
reduce  the  demand  for  all  other  articles  of  consumption.  The 
actual  extent  to  which  any  one  commodity  may  thus  become 
an  alternative  for  any  other  is  of  course  extremely  different 
in  different  cases ; and  a careful  examination  of  these  varying 
connexions  is  a fundamentally  important  element  in  any 
investigation  of  the  specific  laws  of  demand  of  different 
commodities. 

§ 11.  The  point  last  noticed  is  important  in  considering  a 
case  in  the  determination  of  value,  which — to  avoid  needless 
complexity — I have  left  out  of  account  in  the  preceding  dis- 
cussion : be.,  the  case  of  durable  products,  of  which  the  supply 
in  the  market  at  any  time  is  to  a material  extent  not  obtained 
from  producers,  but  consists  of  second-hand  articles  sent  back 
into  the  market  by  consumers.  Sometimes  such  second-hand 
commodities — as  {e.g.)  old  books,  furniture  and  works  of  art 
generally — rise,  more  or  less  out  of  competition  with  any  first- 
hand products,  to  a scarcity  price  which  has  no  relation  to 
cost  of  production.  Even  here,  however,  we  cannot  generally 
regard  the  supply  as  given  independently  of  the  price : since 
the  quantity  supplied  will  tend  to  be  somewhat  increased  by 
any  rise  in  price,  just  as  the  quantity  demanded  tends  to  be 
diminished : so  that  a rise  in  price  caused  by  an  intensification 


208 


POLITICAL  ECONOMY 


BOOK  II 


of  demand  tends  to  be  partly  counteracted  by  the  increased  in- 
ducement to  consumers  to  send  back  the  articles  into  the  market. 
Sometimes,  again,  the  second-hand  commodity  is  practically 
only  an  alteraative  for  a first-hand  commodity  of  a different 
quality, — as  in  the  case  of  second-hand  clothes.  Where  the  two 
kinds  of  supply  compete  effectively  with  each  other, — as  in  the 
important  case  of  houses, — the  second-hand  supply  of  course 
tends  to  affect  the  price  of  the  first-hand  articles  by  lowering 
the  demand  for  them,  as  above  explained;  while  the  cost  of 
production  of  the  first-hand  commodity  tends  to  affect  the  price 
of  the  second-hand  one  in  a peculiar  indirect  way ; the  natural 
price  of  the  latter  tends  to  correspond  to  the  cost  of  producing 
not  the  same  article,  but  an  article  equally  useful.  The  value 
thus  determined  may — through  deterioration  and  change  of 
fashion — be  indefinitely  less,  not  only  than  the  cost  of  pro- 
ducing the  original  article,  but  even  than  the  cost  of  re- 
producing it  in  its  present  condition.  So  long  as  the  demand 
at  the  price  thus  determined  cannot  be  satisfied  by  the  second- 
hand supply,  the  market-price  of  the  latter  will  be  effectively 
maintained  by  the  cost  of  producing  an  equally  useful  article : 
but  if  at  any  time  the  second-hand  supply  is  more  than 
sufficient  to  meet  the  demand  at  this  “ natural  ” price,  the 
market-price  of  the  commodity  may  of  course  be  for  a time 
simply  determined  by  the  relation  of  quantity  to  demand.  This 
{e.g.)  is  liable  to  be  thq  case  with  certain  portions  of  the  supply 
of  immovable  articles,  such  as  buildings. 


CHAPTER  III. 


THEORY  OF  INTERNATIONAL  VALUES. 

§ 1.  In  the  preceding  chapter  the  cost  of  carriage  of  com- 
modities to  the  markets  in  which  their  price  is  actually  deter- 
mined has  been  cursorily  noticed  as  a normal  element  in  the 
cost  of  production.  It  is  almost  superfluous  to  observe  that  it 
is  an  element  to  which  the  development  of  industry  has  hitherto 
tended  to  give  continually  increasing  importance.  Though 
the  progress  of  invention  has  steadily  operated  to  reduce  the 
average  cost  of  conveying  a given  weight  of  goods  over  a given 
space;  still  the  amount  of  goods  carried  and  the  distances  over 
which  they  are  conveyed  have  continually  increased  in  a greater 
ratio;  so  that,  in  the  most  civilised  part  of  the  world,  the 
proportion  of  the  labour  and  capital  of  mankind  at  present 
employed  in  the  business  of  moving  goods  is  larger  than  it  was 
at  any  earlier  period  in  the  history  of  civilisation.  This  is  so 
strikingly  the  case  that  the  growth  of  a nation’s  foreign  trade  is 
sometimes  vaguely  spoken  of  as  though  it  constituted  absolute 
and  unquestionable  evidence  of  advance  in  industrial  prosperity. 
It  may,  therefore,  be  useful  to  point  out — what  might  otherwise 
seem  too  obvious  to  be  worth  stating — that  it  is  ceteris  paribus 
an  economic  disadvantage  that  any  commodity  should  be  pro- 
duced at  a distance  from  the  market  in  which  it  is  normally 
sold ; and  that  if  in  any  case  this  disadvantage  can  be  got  rid  of 
— without  incurring  any  equally  serious  drawback — through 
the  production  at  home  of  some  commodity  hitherto  imported 
from  abroad,  the  resulting  diminution  of  trade  would  obviously 
be  a mark  of  industrial  improvement,  and  not  of  retrogression. 
And  d priori  we  have  every  reason  to  suppose  that,  in  the 
s.  P.  E.  14 


210 


POLITICAL  ECONOMY 


BOOK  II 


continually  changing  conditions  of  industry,  opportunities  for 
this  kind  of  improvement  will  continually  present  themselves; 
and  that  the  vis  ivertiae  of  custom  is  no  less  liable  to  main- 
tain the  importation  from  abroad  of  goods  which  might  be 
advantageously  produced  in  the  proximity  of  their  market, 
than  it  is  to  keep  any  other  part  of  the  process  of  production 
in  an  economically  backward  condition.  And,  therefore,  while 
the  progress  of  industry,  under  the  stimulus  of  alert  and 
enlightened  self-interest,  may  be  doubtless  expected  to  extend 
and  enlarge  trade  continually  in  some  directions,  it  is  at 
the  same  time  probable  that  it  will  reduce  and  diminish  it 
in  others. 

As  in  the  present  chapter  I propose  to  consider  the  special 
conditions  atfecting  the  value  of  commodities  produced  at  a 
considerable  distance  from  their  consumers,  it  seems  expedient 
to  obtain  a clear  view  of  the  cases  in  which  such  production 
is  likely  to  be  remunei-ative,  and  may  accordingly  be  assumed 
as  a normal  element  of  a competitively  organised  industrial 
society.  The  following  are  the  chief  cases  which  it  is  important 
to  distinguish. 

I.  Some  commodities  for  which  there  is  a general  demand 
cannot  be  produced  at  all  except  in  certain  localities,  situated 
at  a considerable  distance  from  important  sections  of  their 
consumers.  This  is  the  case,  generally  speaking,  with  metals 
and  other  products  of  extractive  industry  ; and  also  with  certain 
agricultural  products,  such  as  wines  of  special  quality. 

II.  There  are  other  staples  of  international  trade  which 
could  generally  be  jiroduced  at  a moderate  distance  from  their 
consumers,  at  least  over  a large  part  of  the  region  inhabited  by 
civilised  man ; but  which  can  be  most  economically  produced, 
even  for  distant  markets,  if  a portion  at  least  of  the  requii-ed 
supply  of  them  is  transported  thither  from  certain  places  which 
offer  special  natural  advantages  for  their  production.  This  is 
the  case,  to  a varying  extent,  with  corn  and  other  important 
products  of  agriculture. 

III.  In  other  cases,  again,  commodities  can  be  most 
economically  produced  for  distant  markets  not  on  account  of 
any  special  advantages  afforded  by  the  place  in  which  they  are 
made,  but  because  the  cost  of  carriage  is  outweighed  by  the 
economic  gain  through  co-operation  and  dirtsion  of  labour. 


CHAP.  Ill  THEORY  OF  INTERNATIONAL  VALUES 


211 


obtained  by  the  concentration  of  a manufacture — or  of  several 
connected  manufactures— in  one  locality.  To  some  extent  this 
gain  consists  merely  in  the  substitution  of  a more  important 
saving  of  carriage  for  a less  important ; the  cost  of  conveying 
raw  and  auxiliary  materials  required  in  the  manufacture,  or  of 
conveying  the  product  itself  from  one  set  of  workers  to  another, 
being  reduced  by  the  local  concentration  of  connected  industries 
to  an  extent  that  more  than  compensates  for  the  additional 
cost  of  conveying  the  finished  product  to  the  consumer.  But 
besides  this,  various  other  advantages,  previously  noticed’,  of 
production  on  a large  scale  are  obviously  only  obtainable  if  a 
con-espondingly  large  normal  demand  can  be  secured  for  the 
product ; and  in  the  case  of  commodities  of  which  the  amount 
consumed  by  any  one  individual  is  small,  an  extensive  demand 
must  necessarily  be  the  demand  of  consumers  scattered  over  a 
wide  area. 

IV.  The  gain  thus  derivable  from  co-operation  rendering 
it  economically  advantageous  for  men  to  aggregate  themselves 
in  the  large,  closely  packed  masses  which  we  find  in  continually 
increasing  size  in  modern  industrial  towns,  it  becomes  corre- 
spondingly necessary  to  obtain  the  supply  of  food,  fuel,  and 
certain  other  commodities  i-equired  in  large  amounts  for  the 
ordinary  consumption  of  any  such  mass  by  bringing  a large  part 
of  it  from  a considerable  distance. 

V.  Finally,  we  have  to  notice  the  important  case  in  which 
a commodity  is  most  economically  obtained  from  a distance, 
even  "though  it  could  be  produced  in  the  neighbourhood  of  its 
market  with  no  greater — or  even  less — expenditure  of  labour 
and  capital ; because  the  returns  obtainable  by  equal  laboui- 
and  capital  in  some  other  employment  are  so  much  greater, 
that  the  loss  involved  in  employing  them  to  produce  the 
commodity  in  question  would  more  than  counterbalance  the 
saving  in  cost  of  cari'iage.  A striking  instance  of  this  was 
furnished  by  the  gold  discoveries  of  Australia;  one  consequence 
of  which  was  that  Australia  began  to  import  cheese  and  butter 
largely  from  abroad,  although  the  pastures  of  New  South  Wales 
and  Victoria  offer  unusual  facilities  for  dairy-farming.  The 
high  average  remuneration  obtainable  by  labour  in  gold-mining 


’ Cf.  Book  I.  c.  iv.  § 1). 


U— 2 


212 


POLITICAL  ECONOMY 


BOOK  II 


had  raised  the  wages  of  Australian  labour  generally — and 
therefore  in  dairy- farming — so  much,  that  the  consequent 
additional  cost  of  making  butter  in  Australia  was  greater  than 
the  cost  of  conveying  it  from  Irelands 

§ 2.  It  is  evident  that  this  last  cause  of  foreign  trade  can 
only  operate,  so  far  as  physical  or  social  obstacles  render  the 
mobility  of  labour  temporarily  or  permanently  imperfect.  Had 
it  been  as  easy  to  draw  over  Irish  labourers  to  Australia  as  it  is 
to  bring  them  to  England,  their  influx  would  soon  have  brought 
down  wages  to  a point  at  which  it  would  have  been  less  ex- 
pensive to  produce  the  butter  required  by  Australia  in  Australian 
dairies.  Now,  according  to  Mill,  it  is  only  on  account  of  this 
imperfect  mobility  that  a special  formula  is  required  for  deter- 
mining the  values  of  commodities  brought  from  distant  places ; 
because  owing  to,  the  differences  which  this  imperfect  mobility 
allows  to  subsist  between  the  remuneration  of  labourers  or 
capitalists  or  both  in  different  countries,  cost  of  production 
is  prevented  from  determining  the  normal  value  of  such  im- 
ported commodities.  To  take  Mill’s  illustration : suppose 
England  imports  wine  from  Spain,  giving  cloth  in  exchange : 
then  “ if  the  cloth  and  the  wine  were  both  made  in  Spain,  they 
“ would  exchange  at  their  cost  of  production  in  Spain ; if  they 
“ were  made  in  England,  they  would  exchange  at  their  cost  of 
“production  in  England.  But” — we  are  told — “all  the  cloth 
“ being  made  in  England,  and  all  the  wine  in  Spain,  they  are 
“ in  circumstances  to  which  the  law  of  cost  of  production  is  not 
“applicable.  We  must  accordingly  fall  back”  upon  what  “may 
“ be  appropriately  named  the  Equation  of  International  Demand”; 
the  principle,  namely,  that  “ the  produce  of  a country"  exchanges 
“ for  the  produce  of  other  countries  at  such  values  as  are 
“ required  in  order  that  the  whole  of  her  exports  may  exactly 
“pay  for  the  whole  of  her  imports 

This  Equation  of  Reciprocal  Demand — if  the  phrase  be  not 
too  dignified  for  a formula  that  contains  so  little  information — 
will  doubtless  tend  to  be  realised  in  international  as  well  as  in 
domestic  trade : but  I cannot  agree  with  Mill  that  cost  of 
production  is  to  be  left  altogether  out  of  account  in  the  former, 
any  more  than  in  the  latter  case.  His  error  appears  to  me 

1 Cf.  Cairnes,  Essays  in  Political  Economy,  i.  p.  38. 

^ Mill,  Political  Economy,  Book  ELI.  c.  xviii.  §§  1,  4. 


CHAP,  in  THEORY  OF  INTERNATIONAL  VALUES 


213 


most  simply  manifested  in  the  earlier  part  of  his  argument,  in. 
which,  to  exhibit  the  “ elementary  principle  of  International 
“ Values,”  he  supposes,  for  the  sake  of  argument,  that  the 
carriage  of  commodities  from  one  country  to  the  other  could  be 
effected  without  labour  and  without  cost.  It  is  easy  to  shew 
that,  in  the  circumstances  thus  supposed,  cost  of  production 
must  determine  the  value  of  exported  commodities  just  as  much 
as  the  value  of  commodities  consumed  at  home ; unless  we 
further  suppose  that,  after  the  trade  is  established,  there  is  no 
product  common  to  the  trading  countries — a supposition  mani- 
festly extravagant  in  the  case  of  England  and  Spain  (which  Mill 
takes  as  an  example)  as  well  as  of  most  other  countries  inhabited 
by  modem  nations*.  For  let  us  suppose  that  there  is  at  least 
one  other  commodity — say  corn — which  is  produced  both 
in  England  and  in  Spain.  According  to  Mill’s  general  theory 
of  value,  discussed  in  the  preceding  chapter,  the  relative 
values  oi  cloth  and  com  in  England  must  be  determined 
by  their  comparative  costs  of  production ; and,  again,  the 
relative  values  of  wine  and  corn  in  Spain  must  be  determined 
in  the  same  way.  But  if  we  suppose  cost  of  carriage  to  be 
eliminated,  there  is  no  reason  why  the  value  either  of  wine  or 
cloth  should  be  altered  by  exportation;  hence,  the  values  of 
both  wine  and  cloth  relatively  to  com,  and  therefore  relatively 
to  each  other,  must  be  as  much  determined  by  cost  of  produc- 


' A critic  of  this  chapter — Mr  Bastable,  Theory  of  International  Trade, 
Appendix  C— says  that  I have  “ forgotten  that  Mill  expressly  regards  ” this 
further  hypothesis  “ as  a necessary  consequence  of  the  non-existence  of  cost  of 
“ carriage.  ‘But  for  it,’  he  says,  ‘every  commodity  would  he  regularly  imported 
“ ‘ or  regularly  exported.  A country  would  make  nothing  for  itself  which  it  did 
“ ‘ not  also  make  for  other  countries  ’ ” {Principles,  hi.  18,  § 2).  This,  however, 
does  not  amount  to  saying  that  there  would  be  no  product  common  to  anj'  two 
trading  countries,  if  cost  of  carriage  were  non-existent : since,  granting  Mill’s 
inference,  two  countries  might  still  make  the  same  thing  for  export  to  a third 
as  well  as  for  home  consumption.  But  though  Mill’s  statement  is  not  quite  so 
extravagant  as  that  which  Mr  Bastable  regards  as  its  equivalent,  it  is  certainly 
quite  incorrect, — as,  indeed,  Mr  Bastable  points  out.  For  it  is  obvious  that  in 
the  case  of  any  of  the  chief  products  of  agriculture  and  mining,  a country  might 
be  able  to  produce  a portion  of  the  quantity  required  for  its  own  demand  as 
economically  as  it  could  be  produced  elsewhere,  and  yet  unable  to  produce  more 
except  at  a cost  rapidly  increasing  with  the  amount : in  this  case,  if  we  suppose 
the  cost  of  international  carriage  annihilated,  it  would  still  produce  something 
for  itself  which  it  did  not  produce  for  other  countries. 


214 


POLITICAL  ECONOMY 


BOOK  II 


tion  as  the  values  of  home  commodities  are’.  The  “ Equation 
“ of  International  Demand  ” will  still  be  maintained,  but  it  will 
have  no  effect  in  determining  the  value  of  wine  or  cloth ; since, 
if  we  leave  cost  of  carriage  out  of  account,  there  can  be  no 
reason  why  the  wine  should  be  paid  for  entirely  in  cloth,  or 
vice  versa ; there  can  be  no  reason  w'hy  any  debt  remaining  on 
either  side,  after  balancing  the  wine  against  the  cloth,  should 
not  be  liquidated  in  com  or  some  other  commodity.  As  we 
have  seen  in  the  preceding  chapter,  the  costs  of  production  of 
all  the  commodities  concerned  will,  generally  speaking,  tend  to 
be  somewhat  modified  by  changes  in  the  demand  for  them : but 
this  consideration  is  not  in  itself  a reason  for  special  treatment 
of  international  values ; since,  under  the  circumstances  supposed, 
the  demands  of  the  two  different  countries  for  each  commodity 
might  be  treated  as  one  aggregate  demand. 

It  would  seem  then,  that  if  cost  of  caniage  were  left  out 
of  account  there  would  be  no  need  of  a special  principle  for 
determining  International  Values.  And  in  fact  it  appears  to  me 
that  this  need  essentially  depends  on  a condition  to  which  !Mill 
has  not  adverted : namely,  that  in  explaining  the  determination 
of  international  values — or  rather  of  the  values  of  wares  inter- 
changed between  distant  places — we  have  to  take  into  account 
not  merely  the  expense  of  convepng  wares  into  the  foreign 
country,  but  also  the  expense  of  bringing  home  their  value  in 
some  fonn  or  other.  If  we  take  this  double  cost  of  carriacfe 
into  account,  we  shall  find  that  '■  cost  ’of  production  including 
“ carriage  ” has  an  important  relation  to  the  determination  of 
the  price  of  the  products  of  foreign  trade : as  gi^■ing  the  limits 
between  which  the  competitive  price  tends  to  vary  according  to 
the  varying  conditions  of  demand  for  foreign  products  in  each 
country. 

This  will  become  clearer  if  we  consider  an  exceptional  case 
in  which  cost  of  production,  thus  understood,  would  determine 
the  value  of  the  products  of  foreign  trade,  on  the  assumption 
of  free  competition,  as  definitely  as  it  can  determine  the  value 
of  commodities  produced  at  home. 

’ It  does  not  of  course  follow  that  the  wine  and  cloth  will  exchange  for  each 
other  in  proportion  to  their  respective  costs ; since,  if  (as  Mill  supposes)  labour 
and  capital  are  imperfectly  mobile,  the  cost  of  producing  corn  may  be  different 
in  the  two  countries. 


CHAP.  Ill  THEOBY  OF  INTERNATIONAL  VALUES 


215 


Suppose  there  are  two  countries  A and  B,  precisely  similar 
in  their  conditions  of  production  as  regards  all  commodities 
except  silk,  which  is  produced  in  A and  is  incapable  of  being 
produced  in  B,  though  it  would  be  eagerly  consumed  there ;) 
and  sujipose  that  a trade  previously  prevented  is  now  opened 
for  the  first  time  between  A and  B.  Silk  will  undoubtedly  be 
carried  from  A to  B,  but  as  the  trader  could  take  back  nothing 
which  would  have  a higher  value  in  A than  it  had  in  B,  he 
must  to  recoup  himself  sell  the  silk  permanently  at  a value 
which  will  pay  not  only  the  whole  expense  (including  normal 
profit')  of  carrying  it  from  A to  B,  but  also  the  whole  expense 
of  carrying  back  something  else — whatever  can  be  most  con- 
veniently carried — from  B to  A.  He  must  charge  this,  in  order 
to  get  the  ordinary  profit  ; and  competition  would  prevent  him 
from  charging  more.  In  this  case  the  normal  value  of  silk  in  B 
Avill  evidently  exceed  its  value  in  A by  exactly  the  double  cost 
of  carriage  between  the  two  countries ; and  will  therefore  be 
detennined  by  the  cost  of  production  just  as  much  as  the  value 
of  silk  in  A was  before  the  trade  was  opened. 

The  case  supposed  is  no  doubt  highly  improbable ; and 
even  if  it  existed  at  the  outset,  it  would  most  likely  be  modified 
in  consequence  of  the  trade  itself  It  is  almost  certain  that 
there  would  be  some  commodity  in  the  production  of  which 
the  second  country  B had  a certain  advantage — which  if  pro- 
duced in  A had  to  be  produced  at  a higher  relative  cost  of 
production.  Let  us  suppose  that  there  is  one  such  commodity ; 
which  we  will  take  to  be  hardware.  Then,  even  though  the 
advantage  be  comparatively  slight,  and  less  than  would  be 
required  to  pay  the  cost  of  carrying  the  hardware  from  B to  A, 
it  is  evident  that  the  trader  who  exports  the  silk  to  B will 
gain  something  extra  by  bringing  back  the  proceeds  of  its  sale 
to  A in  hardware  rather  than  any  other  article.  And  this 
extra  gain  — like  any  other  diminution  in  the  expenses  of 
bringing  an  article  to  market — industrial  competition  will  tend 
to  transfer  to  the  consumers.  But  the  question  still  remains. 
To  which  set  of  consumers  will  it  be  transferred  ? to  those  of 
A or  to  those  of  B ? If  the  amount  imported  from  B is  not 

' For  the  purpose  of  this  hypothetical  reasoning  it  is  legitimate  to  suppose 
“normal  profit  ” to  be  more  definitely  and  simply  determined  than  we  have  seen 
to  be  actually  the  case. 


216 


POLITICAL  ECONOMY 


BOOK  II 


sufficient  to  supply  the  whole  demand  for  hardware  in  A,  at  the 
price  at  which  it  can  be  remuneratively  produced  in  that 
country,  the  normal  price  of  hardware  in  A may  be  kept  up  by 
its  home  cost  of  production ; so  that  the  consumers  of  silk  in  B 
will  reap  the  whole  extra  gain.  But  if  we  suppose  that,  when 
the  trade  is  fully  established,  neither  of  the  wares  exchanged 
is  produced  in  the  importing  country,  the  principle  that  “ price 
“ must  correspond  to  cost  of  production  ” does  not  determine 
in  which  of  two  different  ways  the  traders’  profits  will  tend  to 
be  brought  down  to  the  ordinary-  level, — whether  by  selling  A’s 
wares  a little  cheaper  in  B or  B’s  wares  a little  cheaper  in  A. 
The  combination  of  these  two  results  that  the  competition  of 
traders  will  tend  to  bring  about  will  be  determined  ceteris 
paribus,  as  I shall  presently  explain,  by  the  relation  of  the 
demand  for  A’s  wares  in  B to  the  demand  for  Ks  wares  in  A. 
But  at  any  rate  it  must  be  a combination  that  will  realise 
Mill’s  “Equation  of  International  Demand”:  the  trade  Avill  not 
be  in  equilibrium  unless  the  quantity  of  A’s  wares  sold  in  B 
equal  in  value  the  quantity  of  B’s  wares  sold  in  Ah  and  the 
tendency  to  this  result  will  operate  equally,  however  many 
wares  are  exchanged  on  either  side.  The  action  of  industrial 
competition  must  always  be  conceived  as  tending  to  bring  about 
this  equilibrium ; though  actually,  as  the  laws  of  demand 
no  less  than  the  conditions  of  supply  are  continually  varring, 
the  point  of  equilibrium  must  be  conceived  to  undergo  corre- 
sponding variations ; and,  at  any  given  time,  the  tendencies 
towards  equilibrium  may  easily  be  less  strong  than  tendencies 
in  the  opposite  direction,  due  to  unforeseen  changes  in  trade  or 
industry  ^ 

§ 3.  We  may  now  observe  that,  in  the  above  reasoning,  it 
has  not  been  explicitly  assumed  that  labour  and  capital  do  not 
move  freely  between  the  trading  countries but  we  have  made 
this  assumption  implicitly  so  far  as  we  have  ignored  effects  on 
labourers  and  capitalists,  regarded  as  purchasers,  of  any  changes 

^ I assume  for  the  present  that  there  are  no  payments  to  be  made  between 
the  two  countries  on  account  of  other  transactions  than  those  of  trade. 

- Mill  is  right  in  pointing  out  that  there  may  possibly  be  several  points 
of  equilibrium  : the  conditions  of  demand  for  the  commodities  exchanged  may 
be  such  that  the  equation  of  reciprocal  demand  may  be  equally  well  established 
at  any  one  of  a number  of  different  sets  of  prices.  But  this  possibility  is  not 
peculiar  to  the  theorj’  of  International  Values. 


CHAP,  in  THEORY  OF  INTERNATIONAL  VALUES 


217 


in  the  values  of  the  wares  exchanged  in  the  trade.  To  this  extent, 
the  assumption  of  the  imperfect  mobility  of  labour  and  capital 
is  no  doubt  required  to  give  scope  for  the  operation  of  the  law  of 
international  values  above  stated.  For  if  we  suppose  a perfect 
mobility  of  labour  and  capital  within  any  region,  every  change 
in  the  price  of  articles  brought  from  a distance  to  any  place  in 
it  must  be  conceived  to  have  an  effect  proportional  to  its 
magnitude  in  attracting  or  repelling  inhabitants  from  that 
place ; and  in  this  case  the  values  of  wares  interchanged 
between  two  places  within  such  a region  will  be  determined 
ultimately  not  by  the  equation  of  reciprocal  demand  but  by  the 
tendency  to  equalise  the  aggregate  of  utilities  obtainable  by 
similar  sacrifices  in  different  localities.  But  if  labourers  duly 
supplied  with  capital  will  not  transport  themselves  from  A to  B, 
merely  in  order  to  get  B’s  exports  cheaper  at  the  cost  of  getting 
A’s  exports  dearer ; then,  so  far  as  trade  between  distant  places 
exists,  the  normal  values  of  the  products  of  such  trade  will  be 
determined  by  the  equation  of  international  demand. 

No  doubt  the  varying  degrees  of  mobility  of  labour  and 
capital  will  have  important  effects  on  the  course  of  international 
trade ; since — as  we  have  seen — if  wages  and  interest  are 
considerably  higher  in  one  country  than  in  another  it  may  be 
profitable  for  the  former  to  import  commodities  which  it  could 
produce  with  less  labour  and  capital  at  home.  But  in  any  case 
an  essential  part  of  the  reason,  why  a special  theoretical  treat- 
ment has  to  be  applied  to  the  products  of  international  trade,  is 
that  a double  cost  of  carriage  has  here  to  be  taken  into  account. 
In  fact,  we  have  a special  case  of  the  kind  discussed  at  the 
close  of  the  preceding  chapter,  in  which  the  values  of  two 
commodities  are  causally  connected  through  their  being  the 
joint  products  of  one  process  of  production;  the  one  process 
here  being  the  process  of  double  carriage,  each  half  of  which  is 
commercially  inseparable  from  the  other. 

I must  now  explain  a proviso  which  I should  have  placed 
earlier  in  this  chapter,  only  that  it  is  more  easily  understood  at 
the  point  of  the  discussion  which  we  have  now  reached.  We 
cannot,  in  treating  of  international  trade,  conceive  “ price  ” as 
we  conceived  it  in  treating  of  the  general  theory  of  value, 
i.e.,  as  money-price,  the  value  of  money  being  supposed  to 
remain  unchanged.  For  in  treating  of  international  trade,  we 


218 


POLITICAL  ECONOMY 


BOOK  II 


cannot  legitimately  assume  that  the  value  of  gold  and  silver 
bullion — the  metallic  money  of  commerce — remains  unchanged 
as  we  pass  fi’om  one  country  to  another;  since  bullion,  being 
itself  an  article  of  trade,  will  tend  to  have  in  a country-  which 
obtains  it  by  trade  a value  higher  than  that  which  it  has  where 
it  is  produced,  by  some  portion  of  the  cost  of  its  own  caniage 
and  of  that  of  the  equivalent  brought  home  in  exchange  for  it. 
In  the  present  discussion,  therefore,  we  must  conceive  price  as 
estimated  not  in  the  actual  money  of  any  of  the  trading 
countries,  but  by  a standard  of  value  common  to  the  countries, 
obtained  by  estimating  and  allowing  for  the  differences  in  the 
value  of  actual  money : and,  for  consistency,  we  must  apply  the 
same  standard  irr  estimating  cost  of  production*.  It  will  be 
convenient  to  distinguish  the  price  so  estimated  as  “ real  price.” 
The  manner  in  which  this  common  standard  of  value  is  to  be 
obtained  has  been  explained  in  an  earlier  chapter^ ; in  which 
also  the  degree  of  inexactness  to  which  it  is  liable  has  been 
pointed  out. 

With  tliis  iiroviso,  we  may  say  that,  in  the  manner  ex- 
plained in  the  preceding  section,  each  of  two  mutually  trading 
countries  can  normally  obtain  the  wares  of  the  other  at  a price 
somewhat  less  than  cost  of  production  plus  double  carriage, 
owing  to  the  comparative  advantage  that  it  will  usually  have 
over  the  other  in  the  production  of  some  commodity.  It  may 
happen,  of  course,  that  each  product  is  sold  at  such  a price  that 
it  exactly  i^ays  its  own  cost  of  carriage  ; but  there  is  no  general 
tendency  to  this  result.  We  can  only  say  generally  that  the 
home  cost  of  production  together  vdth  double  cost  of  carriage 
gives  us  a maximum  value,  and  home  cost  of  production  without 
cost  of  carriage  a minimum  value ; between  which  the  normal 
value  of  wares  in  a foreign  country  may  varj’  indefinitely  Avith 
the  varying  conditions  of  trade ; but  no  Avares  can  rise,  unless 
very  temjAorarily,  above  the  former  point,  and  only  under  A’ery 
exceptional  circumstances  can  any  fall  beloAv.  the  latter.  In 

J It  will  be  observed  that  I do  not  follow  Mill  in  substituting  “labour”  for 
“ wages  ” as  the  main  element  of  cost,  when  treating  of  international  values. 
I think  that  the  reason  before  given,  for  estimating  cost  of  production  in  terms 
of  remuneration  and  not  of  sacrifice,  applies  to  the  wares  of  international  trade 
as  much  as  to  any  other  products. 

^ Book  I.  c.  ii. 


CHAP.  Ill  THEOKY  OF  INTERNATIONAL  VALUES 


219 


actual  trade  it  never  happens  that  either  extreme  is  reached,  at 
least  by  the  aggregate  of  a country’s  exports : there  are  always 
some  products  to  be  found  in  producing  which  a countiy  has 
at  least  a relative  advantage  as  compared  Avith  some  of  the 
countries  with  which  it  trades ; accordingly  most  (if  not  all) 
of  the  wares  of  international  trade  are  normally  sold  in  the 
countries  importing  them  at  prices  w hich  will  pay  at  least  some 
part  of  their  cost  of  carriage,  as  well  as  their  home  cost  of  pro- 
duction. In  speaking  of  the  home  cost  of  production  of  the  wares 
exchanged,  we  must  bear  in  mind  that  the  cost  of  producing 
such  Avares — estimated  separately  from  the  cost  of  the  trade 
itself — will  often  be  materially  altered  by  the  extension  of  their 
sale  Avhich  the  trade  brings  about ; and  their  prices  as  imports 
Avill  of  course  be  altered  in  the  same  direction  (though  not 
necessarily  in  precisely  the  same  ratio).  On  the  one  hand, 
in  the  case  of  manufactured  articles,  the  extension  of  sale  is 
sometimes  the  cause  of  a material  cheapening  in  their  cost  of 
production,  by  enabling  the  manufacture  to  be  carried  on  upon 
a larger  scale ; Avhile,  on  the  other  hand,  in  the  case  of  agricul- 
tural produce,  we  can  often  observe  that  the  initial  rise  of 
price  Avhich  the  foreign  demand  causes  is  sustained  by  a per- 
manent increase  in  the  cost  of  producing  the  costliest  portion 
of  the  article.  Apart  from  these  reactions  of  demand  on  cost 
of  production,  the  division  of  double  cost  of  carriage  betiA^een 
the  two  countries  Avill  depend  upon  the  degi'ee  in  Avhich  the 
demand  in  either  country  for  the  foreign  Avares  of  the  other  is 
more  easily  extensible  than  the  corresponding  demand  on  the 
other  side,  i.e.,  is  of  such  a kind  that  a comparatively  small 
fall  in  the  jirices  of  the  foreign  Avares  causes,  ceteris  paribus, 
a comparatively  large  extension  in  the  purchases  of  them.  The 
more  this  is  the  case,  the  larger  will  be  the  share  of  the  double 
cost  of  carriage  that  will  tend  to  be  added  to  the  imports  of  the 
country  in  question.  For,  through  the  oscillations  of  supply 
that  practically  determine,  at  any  given  time,  the  division  of 
the  double  cost  of  carriage,  this  extensibility  of  demand  will 
keep  up  the  prices  on  the  one  side  as  compared  with  the  other ; 
so  that  the  equilibrium  of  trade  will  tend  to  be  attained  at 
a rate  of  interchange  favourable  to  the  country  Avhere  the 
demand  for  foreign  wares  is  less  extensible. 

I 4.  The  view  above  given  of  the  determination  of  interna- 


220 


POLITICAL  ECONOMY 


BOOK  II 


tional  values  may — with  due  precautions — be  illustrated  by  the 
familiar  phenomenon  of  the  fluctuations  in  exchange  of  money 
between  two  countries.  For  it  is  by  means  of  these  fluctuations 
that  the  transactions  of  importation  and  exportation  are- econo- 
mically connected ; since  the  payments  due  to  foreigners  in  con- 
sequence of  importation  a^e  normally  liquidated  by  transferring 
the  money-debts  due  from  foreigners  in  consequence  of  exporta- 
tion. When  the  exchange  between  two  countries  is  at  par,  any 
such  debt — assuming  for  simplicity  that  its  pajunent  is  certain 
and  immediate  and  that  both  countries  have  standard  coin  of 
the  same  metal — is  purchasable  on  either  side  for  an  amount 
of  coined  metal  equivalent  to  that  which  the  debt  renders  pay- 
able on  the  other  side  ; the  instrument  of  transfer  being  usually 
a bill  of  exchange, — i.e.,  a written  order  by  the  exporting  mer- 
chant directing  his  con’espondent  in  the  countr}-  to  which  he 
has  exported  to  pay  the  money  due.  In  this  way,  when  the 
exchange  is  at  par  between  two  countries,  as  the  means  of 
paying  money  due  in  either  may  be  purchased  in  the  other  by 
an  equivalent  amount  of  domestic  coin,  the  money-price  of  the 
wares  of  either  in  the  other  will  tend  to  con-espond  to  the 
money-cost  of  production  at  home  together  with  the  money-cost 
of  carriage.  But  if  the  trade  has  produced  an  excess  of  debts 
on  either  side,  it  may  not  be  possible  to  liquidate  it  wthout  the 
payment  of  actual  coin : and  then  competition  may  increase  the 
price  of  bills  payable  in  the  countrj-  to  which  coin  has  to  be 
sent  by  a premium  equivalent  to  the  total  cost  of  sending 
bullion  or  foreign  coin  to  the  country  in  question,  and  trans- 
forming it  into  the  current  coin  of  that  country,  ^^^len  the 
price  of  bills  has  risen  to  this  point,  it  is  evident  that  the  cost 
of  importing  wares  from  the  country  in  question,  to  be  paid  for 
by  these  high-priced  bills,  must  substantially  include  the  cost 
of  conveying  the  money  back  as  well  as  the  cost  of  carnage  of 
the  wares  themselves.  On  the  other  hand,  when  the  opposite 
extreme  of  the  fluctuation  is  reached,  the  cost  of  carriage  of  the 
wares  themselves  is  at  least  partly  paid  by  premiums  on  bills'. 

These  fluctuations  accordingly  exemplify  and  in  a sense 
represent  the  fluctuations  in  the  real  cost  of  obtaining  foreign 
wares  of  which  our  theory  gave  an  account.  But,  for  the  reason 

' I say  “at  least  partly,”  because  in  most  cases  the  expense  of  conveying  goods 
is  greater  than  the  expense  of  conveying  money. 


CHAP.  Ill  THEORY  OF  INTERNATIONAL  VALUES 


221 


explained  in  the  preceding  section,  the  former  do  not  exactly 
correspond  to  the  latter : for  if  money  have  a greater  purchasing 
power  in  (say)  the  United  States  than  in  England,  the  addition 
to  the  real  price  of  English  goods  in  the  United  States,  over 
their  real  price  in  England,  will  be  correspondingly  greater  than 
it  appears ; and  vice  versa. 

In  the  preceding  discussion  I have  supposed  for  simplicity’s 
sake  that  only  two  countries  are  engaged  in  trade,  and  that 
their  mutual  indebtedness  arises  only  from  the  exchange  of 
their  respective  produce.  In  applying  the  theory  to  concrete 
facts  it  must  be  borne  in  mind,  first,  that  the  mutual  indebted- 
ness of  nations  results  “ from  the  relative  totals  of  all  the 
“ amounts  expended  by  each  upon  the  other,  whether  in 
“payment  of  produce  and  manufactures,  or  for  the  purchase 
“ of  shares  and  public  securities,  or  for  the  settlement  of  profits, 
“ commissions,  or  tributes  of  any  kind,  or  for  the  discharge 
of  the  expenses  incurred  in  foreign  residence  or  travel : in 
“ fact,  from  the  entire  payments  (or  promises  to  pay)  which 
“ pass  between  the  respective  countries.  The  liability  incurred 
“ is  identical  in  its  effect,  whatever  its  origin  may  be  ” * ; every 
such  liability  has  to  be  liquidated  by  the  transmission  either 
of  money  or  of  an  order  to  receive  money  payable  in  the 
foreign  country.  Still  the  greater  part  of  the  transactions  by 
which  debts  are  incurred  between  countries,  and  the  means  of 
paying  such  debts  obtained,  consists  of  the  importations  and 
exportations  of  produce. 

And  secondly,  it  must  be  borne  in  mind  that  the  condition 
of  the  Foreign  Exchanges  of  any  country,  and  consequently 
the  share  that  it  pays  of  the  cost  of  its  foreign  trade,  depends 
on  its  relations . of  debit  and  credit  not  with  each  country  sepa- 
rately, but  wuth  all  countries  taken  together;  since,  through 
the  process  technically  called  arbitration  of  exchange,  a pay- 
ment due  from  country  A to  country  B may  be  made  by 
assigning  to  B a debt  due  from  a third  country  C to  A. 
“There  is  some  little  additional  expense,  partly  commission 
“ and  partly  loss  of  interest,  in  settling  debts  in  this  circuitous 
“manner,  and  to  the  extent  of  that  small  difference  the  ex- 
“ change  with  one  country  may  vary  apart  from  that  with 


* GoBchen,  Foreign  Exchanges,  e.  2. 


222 


POLITICAL  ECONOMY 


BOOK  II 


“ others ; but  in  the  main,  the  exchanges  with  all  foreign 
“countries  vary  together,  according  as  the  countr}-  has  a 
“ balance  to  receive  or  to  pay  on  the  general  result  of  its 
“foreign  transactions.”^ 

§ 5.  The  theory  above  expounded  applies,  of  course,  to 
trade  within  a country  no  less  than  to  foreign  trade ; unless, 
as  I said  before,  the  necessity  of  considering  the  equation  of 
reciprocal  demand  is  superseded  by  the  assumption  of  a perfect 
mobility  of  capital  and  labour.  It  is,  therefore,  strictly  to 
be  called  a “ theory  of  the  values  of  wares  exchanged  between 
“ distant  places,”  rather  than  a theory  of  international  values. 
It  is  true  that  in  a country  where  the  same  paper  currency 
was  used  throughout,  the  facts  that  we  have  been  examining 
would  generally  escape  notice ; because  as  the  cost  of  trans- 
mitting money  would  be  trifling,  there  could  be  no  manifest 
fluctuations  of  inland  exchange.  Still,  none  the  less  would 
money  be  more  abundant  and  prices  at  a higher  level  in  towns 
or  districts  for  whose  products  thei'e  was  a keen  demand  in 
other  parts  of  the  country : so  that  the  former  would  really 
bear  less  than  an  equal  share  of  the  cost  of  the  trade  that  they 
carried  on  with  the  latter.  Accordingly,  there  is  no  sharp 
distinction  to  be  drawn — apart  from  the  effects  of  govern- 
mental interference — -between  the  laws  actually  governing  the 
values  of  products  sold  within  the  coiyitry  in  which  they  are 
produced,  and  the  laws  governing  the  values  of  imported  wares. 
All  that  can  be  said  is  that  in  dealing  with  a modern  civilised 
country,  duly  furnished  with  means  of  communication  and  con- 
veyance and  substitutes  for  coin,  the  eiTor  involved  in  our  as- 
sumption that  the  market  values  of  domestic  products  tend  to 
be  everywhere  the  same,  allowing  for  the  cost  of  their  carriage 
to  market,  will  generally  speaking  be  comparatively  slight ; 
whereas  in  considering  the  values  of  the  wares  of  international 
trade,  a similar  error  would  not  unfrequently  be  material-. 

At  the  same  time,  it  is  only  in  the  case  of  Foreign  Trade 

1 Mill,  Book  III.  c.  XX.  § 3. 

^ Hence,  in  the  discussion  of  the  preceding  chapter,  we  neglected,  for  sim- 
plicity’s sake,  the  differences  in  the  purchasing  power  of  monej’  in  different 
localities  within  the  same  country.  These  differences,  as  we  have  before  seen, 
it  is  theoretically  impossible  to  estimate  with  perfect  exactness  ; but  it  should  be 
observed  that  so  far  as  they  actually  exist,  a further  theoretical  imperfection  is 
introduced  into  the  determination  of  value  by  cost  of  production. 


CHAP.  Ill  THEORY  OF  INTERNATIONAL  VALUES 


223 


that  the  investigation  of  the  conditions  of  favourable  inter- 
change excite  practical  interest ; because  it  is  only  in  this 
case  that  there  has  ever  been  a serious  question  of  govern- 
mental interference  with  a view  of  making  the  interchange 
more  favourable.  Whether  such  interference  can  ever  be  on 
the  whole  expedient  I do  not  now  propose  to  discuss:  but  it 
may  be  observed  that  the  theoretical  determination  of  the  divi- 
sion of  the  expenses  of  foreign  trade  does  not  enable  us  to 
determine  the  total  amount  of  the  gain  resulting  from  such 
trade  to  either  nation.  To  know  this,  we  must  know  what 
each  nation  would  have  produced  with  the  labour  and  capital 
now  employed  in  producing  for  foreign  trade:  which  generally 
we  can  but  vaguely  guess. 

Nor,  again,  does  it  in  any  way  follow  that  the  nation  that 
pays  the  greatest  share  of  the  double  cost  of  carriage  is  the 
one  that  gains  least.  Indeed  the  very  opposite  may  very  likely 
be  the  fact ; as  will  appear  if  we  look  again  at  the  hypothetical 
case  considered  in  § 2,  where  we  supposed  an  entirely  unre- 
ciprocated demand  in  one  country  B for  the  products  of  another 
country  A.  Under  these  circumstances,  as  we  saw,  the  trade 
tends  to  be  carried  on  under  the  most  unfavourable  condi- 
tions possible  for  B,  so  far  as  the  division  of  expenses  is  con- 
cerned ; since  the  consumers  in  B have  to  pay  the  whole  of  the 
double  cost  of  carriage.  On  the  other  hand,  it  is  not  improbable 
that  the  consumers  in  B will  have  the  greater  gain  in  utility ; 
since  they  obtain  access  by  the  trade  to  an  entirely  new  com- 
modity, whereas  the  inhabitants  of  A only  obtain  at  best  a 
somewhat  more  economical  way  of  acquiring  commodities  pro- 
ducible at  home. 


CHAPTER  IV. 


DEFINITION  OF  MONEY. 

§ 1.  In  the  course  of  the  preceding  chapter  we  have  been 
led  to  see  the  importance,  in  the  theory-  of  “ international  ” 
values,  of  a clear  view  of  the  nature  and  causes  of  variations 
in  the  value  of  money.  But  the  verj"  denotation  of  the  term 
money  is  so  fluctuating  and  uncertain,  that  before  we  discuss 
the  laws  by  which  its  value  is  determined,  it  seems  desirable 
to  make  a thorough  and  systematic  attempt  to  define  the  term 
itself k 

1 Jevons,  in  his  excellent  little  book  on  “ Money,”  tells  us  that  the  ingenious 
attempts  that  have  been  made  to  define  money  ‘-involve  the  logical  blunder 
“ of  supposing  that  we  may,  by  settling  the  meaning  of  a single  word,  avoid 
“ all  the  complex  differences  and  various  conditions  of  many  things,  requiring 
“ each  its  own  definition.”  .Without  denying  that  this  blunder  has  been  some- 
times committed,  I think  it  misleading  to  suggest,  as  Jevons  does,  that  the 
attempt  to  define  a class-name  necessarily  implies  a neglect  of  the  specific 
differences  of  the  things  contained  in  the  class.  Indeed,  when  he  goes  on  to 
say  that  the  many  things  which  are  or  may  be  called  money — “ bullion,  standard 
“ coin,  token  coin,  convertible  and  inconvertible  notes,  legal  tender  and  not 
“ legal  tender,  cheques  of  various  kinds,  mercantile  bills,  exchequer  bills,  stock 
“ certificates,  &c.” — “ require  each  its  own  definition,”  he  apparently  maintains 
the  rather  paradoxical  position  that  it  is  logically  correct  to  give  definitions  of  a 
number  of  species,  but  logically  erroneous  to  try  to  define  their  common  genus. 
It  is  easy  to  shew  that  several  at  least  of  these  more  special  notions  present  just 
the  same  sort  of  difficulties  when  we  attempt  to  determine  them  precisely  as  the 
wider  notion  “ money”  does.  For  instance,  the  distinction  between  bullion  and 
coin  seems  at  first  sight  plain  enough;  but  when  we  ask  under  which  head  we 
are  to  classify  gold  pieces  circulating  at  their  market  value  in  a country  that 
has  a single  silver  standard,  we  see  that  it  is  not  after  all  so  easy  to  define  coin. 
The  characteristic  of  being  materially  coined, — that  is,  cut  and  stamped  by- 
authority, — though  it  has  always  been  combined  in  our  own  experience  with  the 
characteristic  of  being  legal  tender,  is  capable  of  being  separated  from  it ; so 
that  we  have  to  choose  between  the  two  in  our  definition.  Similarly,  we  may 


CHAP.  IV 


DEFINITION  OF  MONEY 


225 


As  in  previous  attempts  to  obtain  definition,  it  seems 
best  to  begin  by  a careful  and  unbiassed  consideration  of 
the  actual  usage  of  the  term.  And  here  we  are  met  at  the 
outset  by  a rather  remarkable  phenomenon.  There  seems  to 
be  a tolerable  accord  among  persons  who  write  about  money  in 
England  at  the  present  time,  as  to  the  denotation  that  ought 
to  be  given  to  the  term  when  they  directly  attempt  to  define 
it;  at  any  rate,  the  margin  of  difference  is  inconsiderable  in 
comparison  with  the  amount  of  their  agreement.  Unfortu- 
nately the  denotation  so  given  disagrees  very  widely  with 
their  customary  use  of  the  term  when  they  are  not  trying  to 
define  it ; and  this  discrepancy  is  not  of  a minor  kind,  but 
as  fundamental  as  can  well  be  conceived.  When  the  ques- 
tion is  expressly  raised  they  have  no  doubt  that  by  money 
they  mean  what  they  also  call  currency,  that  is,  coin  and 
bank-notes.  They  see  the  need  of  distinguishing  the  latter 
as  paper  money  or  paper  currency ; and  they  recognise  the 
existence  of  a narrower  definition  which  restricts  the  term 
money  to  coined  metal,  on  the  view  that  bank-notes  are  mere 
promises  to  pay  money,  which  ought  not  to  be  confounded  with 


inquire  whether  by  calling  notes  convertible  it  is  merely  meant  that  their  issuer 
has  promised  to  convert  them  into  coin  on  demand,  or  whether  a belief  is 
affirmed  that  he  would  so  convert  them  if  required  ? If  the  latter  alternative 
be  chosen,  it  must  be  evident  that  the  legitimacy  of  such  a belief  must  depend 
upon  the  nature  and  extent  of  the  provisions  made  by  the  issuer  for  meeting 
demands  for  coin ; so  that  in  order  to  define  convertibility  precisely  we  shall 
have  to  determine  what  provisions  are  adequate,  and  whether  all  possible  demands 
should  be  provided  for  or  only  such  as  may  reasonably  be  expected.  Then 
further,  how  shall  we  treat  the  case — which  used  to  be  common  in  the  United 
States — of  notes  for  which  coin  will  almost  certainly  be  paid  if  demanded,  but 
not  without  a serious  loss  of  good-will  to  the  demander  ? In  short,  we  cannot 
escape  the  proverbial  difficulties  of  drawing  a line,  if  we  attempt  to  use  any 
economic  terms  with  precision ; and  instead  of  seeing  in  these  difficulties — as 
Jevons  seems  to  do — a ground  for  not  making  the  attempt,  I venture  to  take  an 
exactly  opposite  view  of  them.  I think  that  there  is  no  method  so  convenient 
for  bringing  before  the  mind  the  “ complex  differences  and  various  conditions  ” 
of  the  matters  that  it  is  occupied  in  studying,  as  just  this  effort  to  define  general 
terms.  The  gain  derived  from  this  process  (as  I have  urged  in  a previous 
chapter)  is  quite  independent  of  its  success.  We  may  find  that  the  reasons  for 
drawing  any  proposed  line  between  money  and  things  rather  like  money  are 
balanced  and  indecisive.  But  since  such  reasons  must  consist  in  statements 
of  the  important  resemblances  and  differences  of  the  things  that  we  are  trying 
to  classify,  the  knowledge  of  them  must  be  useful  in  economic  reasoning, 
whatever  definition  we  may  ultimately  adopt. 

S.  P.  E. 


15 


226 


POLITICAL  ECONOMY 


BOOK  II 


money,  however  currently  they  may  be  taken  for  it.  But  they 
are  generally  disposed  to  reject  this  view  as  a heresy  ; and 
though  the  narrower  sense  is  that  adopted  by  several  econo- 
mists of  repute,  I imagine  that  it  would  be  regarded  as  at  least 
old-fashioned  by  practical  men ; except  so  far  as  the  word  is 
quite  technically  employed  in  relation  to  the  details  of  banking 
business.  Again,  though  in  the  “ Resumption  ” controversy 
in  the  United  States  it  was  maintained  that  inconvertible 
notes  ought  not  to  be  regarded  as  money,  I do  not  think 
a definition  excluding  such  notes — but  including  convertible 
notes — has  ever  found  favour  in  England ; although  EnglLsh 
financial  authorities  are  of  course  agreed  that  inconvertible 
paper  is  a bad  kind  of  money.  Further,  our  authorities  allow 
that  there  is  a certain  resemblance  between  bank-notes  and 
bills  of  exchange,  letters  of  credit,  promissor}'  notes  issued  by 
private  persons,  &c.;  but  though  they  may  regard  these  latter 
as  constituting  an  “ auxiliary  currency,”  they  do  not  consider 
them  to  be  currency  in  the  strictest  sense,  and  therefore  do  not 
call  them  money.  The  only  imjiortant  point  on  which  their 
utterances  are  doubtful  or  conflicting  is  the  question  whether 
notes  issued  by  private  banks  and  not  made  legal  tender  should 
be  considered  as  money ; the  importance  of  this  question,  how- 
ever, so  far  as  England  is  concerned,  is  continually  diminishing. 
But  when  bankers  and  merchants,  or  those  who  write  for  them, 
are  talking  of  “ money”  in  the  sense  in  which,  generally  speak- 
ing, they  are  most  practically  concerned  with  it, — of  money 
which  is  said  to  be  souictimes  “ scarce  ” and  at  other  times 
“ plenti^lul”  in  what  is  called  the  “money  market,” — they  speak 
of  something  which  must  be  defined  quite  differently.  For 
though  coin  and  bank-notes  form  a specially  important  part  of 
money-market  money,  still,  in  such  a country  as  England  where 
deposit-banking  is  fully  developed  and  payment  by  cheque 
customary,  the  greater  part  of  such  money  must  consist  of 
bankers’  promises  to  pay  coin'  on  demand,  not  “embodied”  or 
represented  otherwise  than  by  rows  of  figures  in  their  books. 

What  has  just  been  said  will  appear  to  some  of  my  readers 

' It  maybe  said  that  English  bankers  are  not  strictlj’ liable  to  pay  their  debts 
in  coin,  as  they  may  tender  Bank  of  England  notes  instead.  But  as  these  notes 
are  only  legal  tender  so  long  as  the  Issue  Department  of  the  Bank  of  England 
gives  coin  for  them  on  demand,  the  phrase  in  the  text  is  substantially  accurate. 


CHAP.  IV 


DEFINITION  OF  MONEY 


227 


a truism.  But  there  are  probably  others  to  whom  it  will 
appear  a paradox ; and  for  the  sake  of  these  latter  it  will  be 
well  to  pause  and  illustrate  pretty  fully  this  use  of  the  term 
Money.  I shall  take  my  illustrations  from  Bagehot’s  Lombard 
Street  as  being  a widely  read  book  written  by  a distinguished 
economist  for  practical  men.  Now  it  is  true  that  Bagehot  never 
says  that  in  speaking  of  the  money  of  Lombard  Street,  the 
possession  of  which  makes  England  “ the  greatest  moneyed 
country  in  the  world,”  he  means  a commodity  of  which  the 
greater  part  exists  only  in  the  form  of  bankers’  obligations  to 
pay  money  on  demand,  not  even  embodied  in  bank-notes.  But 
there  are  many  passages  in  which  it  is  clear  that  he  can  mean 
nothing  else’..  Take,  for  example,  the  following: — 

“Every  one  is  aware  that  England... has  much  more  imme- 
“ diately  disposable  and  ready  cash  than  any  other  country. 
“ But  very  few  persons  are  aware  how  much  greater  the  ready 
“ balance — the  floating  loan-fund,  which  can  be  lent  to  any  one 
“ for  any  purpose — is  in  England  than  it  is  anywhere  else  in  the 
“ world.  A very  few  figures  will  shew  how  large  the  London 
“ loan-fund  is,  and  how  much  greater  it  is  than  any  other.  The 
“ known  deposits — the  deposits  of  banks  which  publish  their 
“ accounts — are,  in 

“ London  (31st  December,  1872)  . . £120,000,000 

“ Paris  (27th  February,  1873)  . . 13,000,000 

“ New  York  (February,  1873)  . . 40,000,000 

“German  Empire  (31st  January,  1873)  . 8,000,000 

“ And  the  unknown  deposits — the  deposits  in  banks  which  do 
“ not  publish  their  accounts — are  in  London  much  greater  than 
“ those  in  any  other  of  these  cities.  The  bankers’  deposits  of 
“ London  are  many  times  greater  than  those  of  any  other  city — 
“ those  of  Great  Britain  many  times  greater  than  those  of  any 
“ other  country  ” n. 

Here  Bagehot  clearly  regards  these  bankers’  deposits  as  “ im- 
“ mediately  disposable  and  ready  cash.”  But  if  we  ask  ourselves 
where  and  in  what  form  this  “ cash  ” exists,  it  must  be  evident 
that,  at  any  given  time,  most  of  it  exists  only  in  the  form  of 

^ There  are,  no  doubt,  other  passages  in  Lombard  Street — as  will  be  presently 
noticed — where  “ money  ” is  used  in  the  narrower  sense  of  ■*  metallic  money.” 

2 Lombard  Street,  c.  i.,  p.  4. 


15  ‘L 


228 


POLITICAL  ECONOMY 


BOOK  II 


liabilities  or  obligations,  acknowledged  by  rows  of  figures  in  the 
bankers’  books ; and  that  it  is  transferred  from  owner  to  owner, 
and  thus  fulfils  all  the  functions  of  a medium  of  exchange, 
without  ever  assuming  a more  material  shape.  Most  persons, 
no  doubt,  who  have  not  specially  considered  the  matter,  have 
a vague  impression  that  these  figures  in  bankers’  books  “repre- 
“sent”  sovereigns  or  bank-notes;  which,  though  they  are  not 
actually  in  the  banker’s  possession,  have  yet  passed  through  his 
hands,  and  exist  somewhere  in  the  commercial  world.  But 
if  this  view  does  not  vanish  on  a few  moments’  reflection,  it 
must  at  any  rate  be  effectually  dispelled  by  a perusal  of  Lombard 
Street ; since  the  main  drift  of  that  book  is  to  bring  prominently 
forward  the  fact  that,  in  consequence  of  the  “one-reserve  system” 
upon  which  English  banking  is  constructed,  but  little  of  this 
immense  “ loan-fund  which  can  be  lent  to  any  one  ” could  possibly 
be  presented  in  the  shape  of  coin  or  bank-notes.  Of  course 
some  portion  of  the  money  lent  by  London  bankers  is  continually 
taken  fi-om  them  in  this  shape.  But  a little  reflection  on  the 
mode  in  which  it  is  borrowed  and  used  will  shew  how  com- 
paratively small  this  portion  is.  Such  loans  are  chiefly  made 
to  traders,  either  directly  by  the  bankers  or  through  the  agency 
of  the  bill-brokers ; and  when  a trader  borrows  fi-om  his  bank, 
he  almost  always  does  so  by  having  the  loan  placed  to  his  credit 
in  his  banker’s  books,  and  drawing  against  it  by  cheques ; and 
the  efifect  of  such  cheques,  for  the  most  part,  is  not  to  cause  the 
money  to  be  produced  in  the  form  of  coin  or  notes,  but  merely 
to  transfer  the  claim  on  the  banker  to  some  other  customer  of 
the  same  or  some  other  bank.  The  bank-notes  and  gold  are 
merely  the  small  change  of  such  loans ; and  it  is  only  when 
money  is  lent  to  manufacturers  and  farmers,  who  have  large 
sums  to  pay  in  wages,  that  the  amount  of  this  change  bears 
even  a considerable  proportion  to  the  whole  loan.  It  may  seem 
that  when  cheques  on  one  bank  are  paid  into  another,  material 
money  must  pass  between  bank  and  bank.  But  by  the  system 
of  the  Clearing  House  the  mutual  claims  of  the  different  banks 
are  set  off  against  each  other ; so  that,  even  when  the  balance 
daily  due  from  each  bank  to  any  other  was  paid  in  notes,  the 
amount  of  these  required  was  very  small  in  proportion  to  the 
amount  of  liabilities  transferred ; and  now  no  notes  are  com- 
monly needed  at  all,  as  such  balances  ai'e  paid  by  drafts  on  the 


CHAP.  IV 


DEFINITION  OF  MONEY 


229 


Bank  of  England,  where  the  other  banks  keep  the  main  part  of 
their  reserves. 

But  we  may  reach  the  same  result  more  briefly  by  means  of 
a few  statistics,  which  I take  from  Mr  Palgrave’s  Notes  on 
Banking,  published  in  1873.  Mr  Palgrave  estimates  the  whole 
amount  of  deposits  held  in  English,  Scotch,  and  Irish  banks 
(exclusive  of  the  discount-houses)  on  the  12th  of  March,  1873, 
at  about  486  millions,  the  liabilities  of  the  London  banks  alone 
being  about  179  millions:  while  he  estimates  the  metallic 
circulation  of  the  whole  kingdom  in  1872  at  about  105  millions, 
and  the  note  circulation  at  43  millions.  If  we  consider  that 
more  than  10  millions  of  notes  and  coin  are,  on  the  average, 
kept  as  reserve  by  the  Bank  of  England,  and  that  the  provincial 
banks  require  a considerably  larger  proportion  of  coin  for  their 
daily  business  than  the  London  banks,  we  shall  require  no 
elaborate  proof  to  convince  us  that  the  greater  part  of  the 
“ unequalled  loan-fund  ” of  Lombard  Street  can  never  emerge 
from  the  immaterial  condition  of  bankers’  liabilities  ^ 

The  difficulty,  indeed,  is  not  to  prove  this,  but  rather  to 
explain  why  this  obvious  truth  is  overlooked,  or  even  implicitly 
denied ; not  merely,  as  has  already  been  said,  in  all  formal 
definitions  of  money,  but  in  most  of  what  is  said  and  written 
about  the  functions  of  bankers.  Mill,  for  instance,  implies 
over  and  over  again  that  the  medium  of  exchange,  which  it  is 
the  business  of  bankers  to  collect  from  private  individuals  and 
lend  to  traders,  consists  altogether  of  coined  metal — or  at  least 
of  coin  and  paper  substitutes  for  coin  made  legal  tender  by 
Government and  a similar  implication  is  contained  in  much 
of  Bagehot’s  language^. 

I 2.  The  explanation  of  this  serious  and  Avide-spread  in- 
accuracy of  thought  and  language  is,  I think,  two-fold.  In 

‘ In  a paper  published  by  the  Statistical  Society  in  March,  1876,  Mr  John 
Dun  estimated  the  deposits  of  the  banks  of  the  United  Kingdom  to  amount  to 
over  590  millions  of  pounds. 

^ Compare,  among  other  passages,  Book  III.,  c.  xi.  § 2 and  c.  xii.  § 2. 

s Cf.  (e.g.)  Lombard  Street,  c.  vi.,  p.  143.  The  only  English  writers  on 
currency  known  to  me  who  adequately  avoid  this  erroneous  conception  are 
Professor  Bonamy  Price  and  Mr  Macleod ; and  I may  take  this  occasion  to 
acknowledge  my  obligations  in  the  present  chapter  to  Mr  Macleod’s  Theory  of 
Banking.  In  saying  this,  I must  guard  myself  against  being  understood  to 
approve  of  Mr  Macleod’s  general  treatment  of  Economies. 


230 


POLITICAL  ECONOMY 


BOOK  II 


many  cases  it  is  due  to  an  inadvertent  inference  from  a part 
to  the  whole,  of  the  kind  that  has  caused  so  many  economic 
fallacies.  A practical  man  is  aware  that  (in  ordinary  times) 
he  can  convert  any  portion  of  his  banker’s  liabilities  into  gold 
or  notes  at  will,  and  that  he  only  leaves  it  in  its  immaterial 
condition  for  his  own  convenience, — being  less  afraid  of  the 
failure  of  his  bank  than  he  is  of  having  his  gold  or  notes 
stolen.  Hence  he  naturally  comes  to  think  and  speak  of  all 
the  “ money  at  his  bank  ” as  “ ready  cash  ” ; and  thus,  vdth 
Bagehot,  conceives  England  as  having  “ more  ready  cash  ” than 
any  other  country.  When,  however,  he  comes  to  consider 
possible  crises  and  collapses  of  credit,  the  difference  between 
bankers’  liabilities  and  their  means  of  meeting  them  becomes 
only  too  palpable;  the  same  thing  that  he  has  just  called 
“ cash  ” appears  to  him  in  its  opposite  character  of  “ credit  ” ; 
and — again  with  Bagehot — he  views  England’s  “ cash  in  hand  ” 
as  being  “ so  exceedingly  small  that  a bystander  almost  trem- 
“ bles  at  its  minuteness  compared  with  the  immensity  of  the 
“ credit  that  rests  upon  it.”  These  two  views  of  “ cash  ” or 
“ money  ” exist  side  by  side  in  his  mind,  without  being  brought 
into  any  clear  or  consistent  relation  to  each  other;  and  thus 
we  get  the  paradoxical  result  which  I noticed  at  starting,  that 
when  such  a practical  man  is  called  upon  to  give  an  express 
definition  of  money,  he  formally  ignores  the  greater  part  of  the 
actual  medium  of  exchange,  of  which  in  the  ordinaiy  course 
of  his  business  he  is  continually  thinking  and  speaking  as 
“ money.” 

So  far,  however,  as  this  inadequate  representation  of  the  facts 
is  common  also  to  theoretical  economists,  it  is  rather  because  the 
existence  of  this  immaterial  money  is  obscured  to  their  \dew, 
not  by  the  material  money  into  which  the  banker  is  bound  to 
convert  it,  but  by  the  goods  other  than  money  which  the  bankers’ 
customers  purchase  by  means  of  it. 

For  instance.  Mill  begins  his  chapter  on  the  Value  of  Money 
by  “ clearing  from  our  path  a formidable  ambiguity  of  language,” 
by  which,  as  he  explains,  money  is  commonly  confounded  A^th 
capital. 

“ When  one  person  lends  to  another,”  he  says,  “ what  he 
“ really  lends  is  so  much  capital ; the  money  is  the  mere  instru- 
“ ment  of  the  transfer.  But  the  capital  usually  passes  from  the 


CHAP.  IV 


DEFINITION  OF  MONEY 


231 


“ lender  to  the  receiver  through  the  means  either  of  money,  or 
“ of  an  order  to  receive  money,  and  at  any  rate  it  is  in  money 
“ that  the  capital  is  computed  and  estimated.  Hence,  bon-owing 
“ capital  is  universally  called  borrowing  money ; the  loan  market 
“ is  called  the  money  market  ....  and  the  equivalent  given  for 
“ the  use  of  capital,  or,  in  other  words,  interest,  is  not  only  called 
“ the  interest  of  money,  but,  by  a grosser  perversion  of  terms, 
“ the  value  of  money.” 

Now,  I do  not  deny  that  there  is  a confusing  ambiguity  in 
the  phrase,  “ value  of  money  ” ; but  the  language  that  Mill 
uses  in  exposing  it  seems  to  me  open  to  a similar  objection. 
It  is  true  that,  when  the  value  of  money  is  mentioned  in 
Lombard  Street,  it  is  not  the  purchasing  power  of  money, 
measured  in  commodities,  that  is  intended ; it  is,  however, 
strictly  and  precisely  the  value  of  the  temporary  use,  not  of 
capital  generally,  but  of  money  (including  bankers’  obligations) 
in  particular^ ; estimated,  as  other  values  are  commonly  esti- 
mated, in  terms  of  money.  Of  course,  a man  ordinarily  borrows 
money  in  order  to  buy  something  else,  or  to  pay  for  something 
already  bought ; but  what  he  actually  borrows — and  is  legally 
bound  to  repay — is  the  medium  of  exchange,  and  it  is  materially 
inexact  to  represent  him  as  borrowing  anything  else.  In 
borrowing  and  lending,  just  as  in  ordinary  buying  and  selling, 
the  function  of  the  medium  of  exchange  is  to  facilitate — while 
also  complicating — the  transfer  of  other  commodities ; but  that 
is  no  justification  for  suppressing  the  fact  of  its  intervention,  or 
misrepresenting  its  nature-.  This  intervention  of  course,  is  not 
strictly  indispensable ; commodities  might  be  exchanged  directly 

1 The  causes  which  tend  to  make  the  rate  of  interest  or  discount  paid  for  the 
use  of  money  diverge  somewhat  from  the  rate  of  interest  on  capital  generally  will 
be  discussed  in  the  next  chapter. 

^ When  Mill  speaks  contemptuously  of  an  “extension  of  credit  being  talked 
“of.. .as  if  credit  actually  were  capital,’’  whereas  it  is  only  “permission  to  use 
“the  capital  of  another  person, ”,it  is  to  be  observed  that,  in  a certain  sense 
it  may  be  said  of  gold  coin  that  its  only  function  is  to  “ permit  ” or  enable 
its  owner  to  obtain  and  use  other  wealth : and  that  it  is  only  in  this  sense  that 
Mill’s  statement  is  true  of  the  credit  or  liabilities  which  a banker  lends  to  his 
customers,  whether  in  the  form  of  notes,  or  under  the  rather  misleading  name 
of  “ deposits.’’  This  credit,  no  doubt,  is  a comparatively  fragile  and  perishable 
instrument  for  transferring  wealth ; but  that  is  no  reason  for  ignoring  the  fact 
that,  in  a modern  industrial  community,  it  is  the  instrument  mainly  used  for 
this  important  purpose. 


232 


POLITICAL  ECONOMY 


BOOK  II 


fjor  each  other,  or  borrowed  without  the  iatervention  of  a 
medium,  as  houses  and  land,  for  the  most  part,  actually  are 
borrowed.  And  it  may  be  useful  sometimes,  in  giving  a 
general  view  of  economic  facts,  to  omit  the  medium  of  ex- 
change altogether  from  our  consideration ; and  to  represent 
the  persons  who  purchase  goods  with  “ money  ” borrowed  from 
banks  as  substantially  borrowing  the  goods  from  the  bankers’ 
customers.  But  in  so  doing  we  should  bear  in  mind  how  much 
this  simplified  view  of  the  facts  diverges  from  the  reality ; and 
not  mix  it  up  with  any  statements  that  aim  at  representing  the 
facts  of  exchange  as  they  really  are.  It  is  undeniable  that,  in 
England  now,  wealth  is  chiefly  transferred  by  the  intervention 
of  a medium  of  exchange  complex  in  composition;  consisting 
partly  of  gold  and  silver  coin,  partly  of  bank-notes,  but  to  a 
greater  extent  of  bankers’  obligations  to  pay  coin  on  demand, 
not  represented  by  notes ; and  it  is  chiefly  this  medium  that  is 
actually  lent  and  borrowed  in  commercial  and  industrial  loan- 
transactions.  And  it  is  no  less  undeniable  that  the  immaterial 
part  of  this  instrument  has  functions  precisely  similar  to  those 
of  the  material  portion ; that  it  is  as  effective  in  purchasing 
goods ; that  borrowers  pay  the  same  interest  or  discount  for  the 
use  of  it ; and  that  it,  no  less  than  metallic  or  paper  money,  is 
in  ordinary  times  currently  accepted  in  final  settlement  of  all 
debts — except,  of  course,  the  debts  of  bankers. 

§ 3.  For  the  reasons  above  given,  I think  it  convenient  for 
many  purposes  to  keep  close — as  Bagehot  implicitly  does — to 
the  use  of  the  term  money  cuiTent  in  the  money-market,  and 
to  denote  by  it  the  whole  of  the  ordinary  medium  of  exchange. 
The  essential  and  fundamental  function  of  money  is  to  be  used 
in  exchanges  and  other  transfers  of  wealth,  where  the  object 
is  to  transfer  not  some  particular  commodity  but  command 
over  commodities  generally:  it  is  as  a medium  of  wealth- 
transfer^  that  money  is  qualified  for  performing  its  other  im- 
portant function  of  measuring  values^  If,  then,  we  take  this 

* This  would  be  a more  strictly  appropriate  term  than  “ medium  of  exchange  ” 
in  a general  account  of  the  functions  of  money:  since  there  are  many  transfers 
of  wealth  which  are  not  in  any  sense  exchanges,  such  as  payment  of  fines  and 
damages,  distribution  of  property  or  income  among  members  of  a family,  &c.  ; 
but  I have  thought  it  best  generally  to  use  the  more  familiar  term. 

^ Jevons  (Money,  c.  iii.)  distinguishes  “four  functions  which  money  fulfils 
“in  modern  societies.”  It  is  (1)  a medium  of  exchange,  (2)  a measure  of  value. 


CHAP.  IV 


DEFINITION  OF  MONEY 


233 


function  as  essential ; if  we  understand  by  money  “ that  which 
“passes  freely  from”  owner  to  owner  “throughout  the  community, 
“in  final  discharge  of  debts  and  full  payment  for  commodities  ; 


(3)  a standard  of  value  [i.e.,  as  Mr  Walker  says,  a “standard  for  deferred 
“ payments  ”],  (4)  a store  of  value.  It  is  obvious  that  the  second  and  third  uses 
follow  naturally — though  not,  as  Jevons  points  out,  necessarily— from  the  first. 

As  regards  the  fourth  function,  I agree  with  Mr  Walker  in  declining  to 
attribute  it  to  money  in  the  present  economic  condition  of  the  most  civilised 
societies.  No  doubt,  in  an  earlier  stage  of  economic  development,  the  precious 
metals  are  largely  used  for  hoarding  as  well  as  for  currency ; and,  in  a certain 
sense,  any  medium  of  exchange  must  always  be  also  a store  of  value ; that  is, 
each  man  must  keep  somewhere,  so  as  to  be  obtainable  without  material  delay, 
a sufficient  quantity  of  it  for  his  ordinary  purchases.  But  Jevons  seems  to  mean 
by  a “ store  of  value  ” something  that  a person  “ may  hoard  away  for  a time  ” ; 
i.e.,  something  which  he  does  not  intend  to  use  for  current  purchases,  but  keeps 
for  a remote  occasion.  In  this  sense — undoubtedly  most  appropriate  to  the 
term  “ store  ” — I must  deny  that  metallic  money  is  adapted  to  be  a “ store  of 
“ value,”  or  is  ordinarily  used  for  this  purpose  in  modern  societies.  Debts 
payable  before  the  remote  occasion  arrives  (or  portions  of  capital  believed  to  be 
readily  saleable)  are  the  commodities  chiefly  used  in  this  way  by  modern  men 
of  business.  I maj'  observe,  moreover,  that  most  of  the  language  in  which 
Jevons  explains  what  he  denotes  by  a “ store  of  value  ” appears  to  me  merely  to 
describe  a medium  of  international  exchange.  “ It  is  worthy  of  inquiry,”  he 
says,  “ whether  money  does  not  also  serve  a fourth  distinct  purpose — that  of 
“embodying  value  in  a convenient  form  for  conveyance  to  distant  places. ..at 
“times  a person  needs  to  condense  his  property  into  the  smallest  compass,  so 
“ that  he  may  carry  it  with  him  on  a long  journey,  or  transmit  it  to  a friend  in 
“ a distant  country.”  But,  so  long  as  the  journey  or  transmission  is  within  the 
range  of  “ modern  societies,”  what  a man  carries  or  sends  is  commonly  some 
document  transferring  to  a foreign  banker  a portion  of  his  home  banker’s 
obligations  to  pay  him  money  on  demand ; the  foreign  banker  being  ultimately 
repaid  by  having  transferred  to  him  some  foreign  merchant’s  debt  that  has 
been  purchased  by  the  home  banker.  The  whole  transaction  is  obviously  one 
of  international  exchange. 

1 In  the  above  quotation  from  Mr  Walker  (Money,  Trade,  and  Industry,  p.  4), 
I have  substituted  the  phrase  “from  owner  to  owner”  in  the  place  of  “from 
“hand  to  hand.”  It  appears  to  be  the  difference  between  the  two  phrases  which 
renders  Mr  Walker  unwilling  to  recognise  deposits  in  banks  as  money ; since 
they  cannot  “ pass  from  hand  to  hand,”  as  notes  do.  But  surely  when  payment 
is  made  by  means  of  notes  (not  being  legal  tender),  the  important  fact  is  not  the 
mere  physical  transmission  of  pieces  of  paper,  but  the  transfer  of  claims  on  the 
banker  : which  is  equally  effected  when  payment  is  made  by  cheques.  No  doubt 
the  receiver  of  the  cheque  might  demand  payment  in  notes : but  similarly 
the  receiver  of  notes  might  pay  them  in  and  have  the  sum  added  to  his  account. 
The  former,  again,  might  ask  for  payment  in  gold ; but  so  equally  might  the 
latter.  From  neither  point  of  view  does  there  appear  to  be  any  essential 
distinction  between  the  two.  In  saying  this,  I do  not  mean  to  ignore  the 
important  practical  difference  that  exists  between  payment  by  notes  and  pay- 
ment by  cheques.  Cheques  do  not  circulate  as  notes  do : the  receiver  of  a 


234 


POLITICAL  ECONOMY 


BOOK  II 


then,  in  all  ordinary  conditions  of  modem  commercial  societies, 
bankers’  debts  payable  on  demand,  however  acknowledged  and 
transferred,  are  as  rightly  called  money  as  they  are  commonly  so 
designated ; and  in  all  consideration  of  the  quantity  of  money 
available  for  commercial  or  other  purposes,  this  fact  ought  to  be 
distinctly  recognised. 

It  may  be  urged,  perhaps,  that  bankers’  debts  are  not 
accepted  in  final  discharge  of  other  debts,  because  they  have  to 
be  discharged  by  the  bankers  themselves  in  coin  or  legal-tender 
notes.  But  though  each  banker  is  under  a general  obligation 
of  liquidating  any  portion  of  his  liabilities  in  this  way,  practically 
any  such  liquidation  of  liabilities  in  one  case  is  balanced  by  an 
opposite  tran-saction  with  some  other  customer  by  which  the 
banker  receives  gold  or  notes  in  exchange  for  his  own  liabilities : 
so  that,  if  we  consider  his  transactions  in  the  aggregate,  it  re- 
mains broadly  true  that,  in  ordinary  times,  bankers’  liabilities 
are  accepted  in  final  discharge  of  ordinary  debts.  Still  the  fact 
that  any  banker  may  be  at  any  time  called  upon  to  fulfil  his  legal 
obligation,  of  paying  coin  or  legal-tender  notes  to  the  extent  of 
his  liabilities,  constitutes  an  important  distinctive  characteristic 
of  that  part  of  the  medium  of  exchange  which  consists  of  such 
liabilities : there  is  certainly  a sense  in  which  the  discharge  of 
debts  by  gold  or  legal -tender  notes  is  more  final ; and  it  is  a 
tenable  view  that  the  term  “ money”  should  be  strictly  confined 
to  what  possesses  this  higher  degree  of  finality.  I think,  how- 
ever, that  legal  currency  hardly  gives  a sufficiently  important 
distinction  in  the  case  of  notes  convertible  into  coin  on  demand ; 
since  the  equivalence  of  such  notes  to  the  coin  they  nominally 
represent  is  sustained  not  by  their  legal  currency  (which  is  of 
course  no  protection  against  depreciation  by  over-issue),  but  by 
the  belief  that  they  can  be  exchanged  for  coin  at  wall.  And 
though  in  some  countries  this  belief  may  be  firmer  and  better 

cheque  commonly  pays  it  in  witliout  delay  and  thus  selects  the  banker  whose 
liabilities  he  consents  to  take  as  money,  whereas  the  receiver  of  a note  usually 
exercises  no  such  choice ; so  that  the  transfer  of  bankers’  liabilities  is  more 
complicated  in  the  former  case  than  in  the  latter ; since,  as  was  before  observed, 
there  is  a change  of  bankers  as  well  as  a change  of  bankers’  customers.  But 
none  the  less  is  the  essence  of  the  transaction  a transfer  of  bankers’  obligations 
“ in  final  discharge  of  debts  and  full  payment  for  commodities.”  Accordingly 
a definition  of  money  which  includes  bank-notes  generally  and  excludes  the  rest 
of  bankers’  liabilities  is,  I think,  quite  unacceptable. 


CHAP.  IV 


DEFINITION  OF  MONEY 


235 


grounded  where  the  credit  of  Government  is  pledged  to  con- 
version than  in  the  case  of  notes  issued  by  private  bankers,  we 
cannot  affirm  this  as  a universal  law;  and  at  any  rate  the 
difference  of  security  is  only  a difference  of  degree'.  On  the 
other  hand,  the  characteristic  of  “ finality  ” belongs  in  the 
highest  degree  to  the  inconvertible  notes  for  which  a modern 
Government  can  usually  secure  practically  complete  currency,  as 
an  internal  medium  of  exchange,  by  (1)  undertaking  to  receive 
such  notes  at  their  nominal  value  in  the  payment  of  taxes  and 
other  debts  due  to  the  public  treasury,  and  (2)  making  them 
legal  tender  for  the  payment  of  all  debts  of  money  not  contracted 
under  the  express  condition  that  they  are  to  be  paid  otherwise. 
But  as  the  finality  of  such  notes  is  only  attained  at  the  cost  of 
rendering  them  liable  to  depreciation  from  over-issue,  their 
inferiority  to  convertible  notes  is  so  palpable  and  so  universally 
recognised  that  it  would  be  practically  very  awkward  to  dignify 
the  former  by  the  title  of  money  while  refusing  it  to  the  latter. 

Metallic  money  or  coin  is  no  doubt  distinguished  from  the 
other  constituents  of  our  actual  medium  of  exchange  by  the 
important  attribute  of  being  composed  of  a material  that  has  a 
high  value  for  other  purposes ; and  also  because,  except  in  the 
case  of  an  inconvertible  paper  currency,  the  value  of  all  the 


1 It  is  sometimes  forgotten  that  the  notes  of  the  Bank  of  England,  though 
in  a certain  sense  “ legal  money,”  are  not  so  in  the  sense  most  important  to 
the  political  economist ; since  their  legal  currency  would  cease,  if  the  Issue 
Department  ceased  to  give  gold  for  them,  and  therefore  could  hardly  be  effective 
in  sustaining  their  value,  if  this  ever  came  to  be  seriously  doubted.  No  doubt 
the  quality  of  these  notes  is  unique ; in  the  severest  crisis  they  would  be  taken 
as  readily  as  gold.  But  this  is  not  due  to  the  fact  that  they  are  legal  tender,  but 
to  the  special  provision  made  for  maintaining  their  convertibility ; and  perhaps 
even  more  to  the  general  belief  that  the  credit  of  the  English  Government  is 
practically  pledged  to  maintain  it.  And  here  again  it  must  be  observed  that  the 
unique  position  of  the  Bank  of  England  has  now  practically  an  almost  equal 
effect  in  sustaining  the  currency  of  the  liabilities  of  its  banking  department ; in. 
the  worst  of  panics  everyone  has  considered  “money  deposited”  with  the  Bank 
of  England  as  safe  as  its  bank-notes  in  his  own  strong  chest. 

Hence  it  seems  to  me  that,  in  relation  to  English  finance,  the  definition 
of  money  that  includes  bank-notes  generally,  and  excludes  the  rest  of  bankers’ 
liabilities,  is  specially  indefensible ; since  it  ignores  the  profound  distinction 
that  separates  the  credit  of  the  Bank  of  England  from  the  credit  of  all  other 
banks,  while  it  unduly  emphasises  the  more  superficial  distinction  between  the 
liabilities  of  provincial  banks  that  are  transferred  by  notes  and  the  liabilities  of 
the  London  joint-stock  banks  that  are  transferred  by  cheques. 


236 


POLITICAL  ECONOMY 


BOOK  II 


rest  of  the  lo  odium  of  exchange  depends  on  the  belief  that  any 
given  portion  of  it  could  be  exchanged  for  coin  at  -will.  This 
fact  is  sometimes  expressed  by  the  statement  that  metaibc 
money  alone  has  “ intrinsic  value.”  But  the  phrase  seems  to 
me  misleading ; since  it  is  not  the  difference  in  the  source 
of  the  value  of  coin,  confusedly  expressed  by  the  word  “in- 
trinsic,” which  is  practically  important,  but  the  difference 
in  its  range  and  permanence.  It  is  not  because  coin  is  made 
of  a more  expensive  material  that  it  is  a better  money  than 
notes ; but  because  it  can  be  used  as  a medium  of  exchange 
over  a wider  area,  and  because  its  value  is  not  liable  to  sudden 
destruction  through  the  insolvency  of  the  issuer  or  to  sudden 
diminution  in  consequence  of  excessive  issues.  And  it  should 
be  borne  in  mind  that  these  distinctions  are  not  of  absolute 
and  unvarying  importance ; there  is  no  reason  why  we  may  not, 
some  time  or  other,  have  an  international  circulation  of  bank- 
notes ; and  the  progress  of  science  and  industry  might  so  enlarge 
the  supply  of  gold  as  to  make  it  possible  for  a %vise  and  stable 
Government  to  devise  a paper  currency  of  more  durable  value 
than  gold  coin  would  then  be,  if  still  issued  as  at  present. 

Still,  under  existing  circumstances,  the  distinction  between 
metallic  money  and  bankers’  obligations — especially  in  a com- 
munity that  abstains  from  inconvertible  paper — remains  funda- 
mentally important ; and  I should  have  no  objection  to  restrict 
the  term  money  to  the  fomier,  if  any  short  word,  sanctioned 
by  usage,  could  be  found  for  the  whole  medium  of  exchange. 
Since,  however,  this  is  not  the  case,  it  seems  best  to  use 
“ money  ” in  the  wider  signification  which  it  has  in  the  money- 
market,  and  to  refer  to  metallic  money  as  “ coin.” 

And  it  must  be  borne  in  mind  that  even  this  definition  is 
not  wide  enough  for  certain  purposes ; as  it  does  not  cover  the 
actual  medium  of  exchange  used  in  foreign — and  to  some  extent 
internal — trade.  The  metallic  money  of  commerce  is  properly 
bvdlion,  not  coin ; the  latter  is  used  for  the  payment  of  foreign 
debts  only  so  far  as  it  is  the  most  convenient  form  of  bullion. 
And  the  non-metallic  medium  of  commercial  exchange  still 
consists  to  a great  extent  of  merchants’,  not  bankers’,  obbga- 
tions ; that  is,  of  bills  of  exchange,  so  far  as  they  still  circulate 
among  traders  and  are  not  at  once  discounted.  Again,  there 
are  certain  widely  accepted  securities — the  bonds  of  some 


CHAP.  IV 


DEFINITION  OF  MONEY 


237 


Govemments,  of  some  railways,  &c. — which  are  so  much  more 
convenient  for  transmission  than  bullion  that  they  are  fre- 
quently used  as  substitutes  for  bullion  in  the  payment  of  inter- 
national debts.  When  such  securities  have  come  to  be  bought 
and  sold  with  a view  to  the  fulfilment  of  this  function,  to  deny 
that  they  possess  pro  tanto  the  most  essential  characteristic  of 
money,  would  be  to  make  ourselves  the  slaves  of  language. 
Since,  however,  neither  merchants’  debts  nor  the  debts  of 
Governments,  &c.  form  a medium  of  exchange  currently  accepted 
throughout  a community  in  final  settlement  of  debts ; it  seems 
to  me  most  convenient  to  call  them  not  money,  but  “ substitutes 
“ for  money.” 

This  leads  me  to  notice  an  objection  that  is  likely  to  be 
brought  against  the  view  above  expounded.  It  may  be  said 
that  what  I have  called  Money  is  merely  a part  of  what  other 
economists  have  called  Credit,  and  that  it  is  more  convenient 
to  keep  this  term  as  indicating  its  real  quality.  And  I should 
quite  admit  that  for  some  purposes  it  is  important  to  insist 
on  the  fact  that  bankers’  debts  are  after  all  debts,  no  less  than 
those  of  private  individuals.  But  in  a general  consideration  of 
the  manner  in  which  the  functions  of  money  are  performed, 
it  seems  to  me  more  important  to  point  out  that  there  is  as 
much  difference  between  one  kind  of  credit  and  another,  in 
respect  of  its  currency,  as  there  is  between  gold  and  “goods.” 
If  a private  individual  (A)  obtains  any  valuable  article  from 
another  (B)  by  promising  to  pay  for  it  hereafter,  and  does  pay 
for  it,  the  credit  he  receives  obviously  does  not  operate  as 
a substitute  for  money  at  all,  in  the  long  run — though  it 
tends  pro  tanto  to  raise  prices  temporarily.  Only  if  B uses 
A’s  debt  to  him  as  a means  of  purchasing  another  commodity 
from  C does  this  credit  begin  to  be  a substitute  for  money: 
if  C uses  it  similarly  in  a similar  transaction  with  D,  its 
efficiency  as  a substitute  is  doubled.  But  it  is  not  until  such 
a debt  has  come  to  be  taken  without  any  idea  of  using  it 
otherwise  than  as  a means  of  payment  that  it  has  completely 
acquired  the  characteristics  of  money.  That  this  is,  in  ordi- 
nary times,  the  case  with  bankers’  obligations  taken  in  the 
aggregate  is  undeniable ; though  (as  I have  said)  the  fact  is 
obscured  by  the  continual  liquidation  in  gold  of  small  portions 
of  such  obligations. 


CHAPTER  V. 


VALUE  OF  MONEY. 

§ 1.  We  have  seen  in  the  preceding  chapter  that  the  me- 
dium of  exchange,  in  a society  like  our  own,  with  a fully 
developed  banking  system  but  without  inconvertible  paper, 
should  be  conceived  as  consisting  partly  of  metallic  money,  but 
to  a much  larger  extent  of  bankers’  promises  to  pay  metallic 
money  on  demand.  These  bankers’  obligations  are  partly  repre- 
sented by  bank-notes  which  pass  from  hand  to  hand ; but  in 
England  they  are  for  the  most  part  merely  acknowledged  in 
the  bankers’  books,  and  transfeiTed  by  means  of  cheques.  When 
a financial  crisis  occurs  and  mutual  suspicion  suddenly  invades 
the  commercial  part  of  the  community,  the  available  amount  of 
this  immaterial  medium  of  exchange  is  liable  to  shrink  suddenlj", 
through  the  widespread  distrust  of  certain  portions  of  it;  so  that 
the  superiority  in  stability  of  other  portions  becomes  of  great 
practical  importance.  This  superiority  may  be  due  to  a special 
connexion  between  the  Government  of  the  society  and  a certain 
bank : for  instance,  we  have  already  noticed  that,  through  the 
special  relations  existing  between  the  Govemment  and  the 
Bank  of  England,  the  promises  of  the  latter  occupy  a unique 
position  among  the  promises  of  English  bankers'.  But  however 
important  may  be  the  differences  betw^een  different  species  of 
bankers’  debts,  they  are  all  equally  accepted — so  far  as  they  are 
used  as  a medium  of  exchange — as  of  equal  value  ^nth  the  coin 
into  which  they  are  nominally  convertible  on  demand.  Of 

1 As  has  already  been  noticed,  this  is  true  not  merely  of  the  notes  issued  by 
the  Issue  Department,  but  also  of  the  obligations  of  the  Banking  Department ; 
though  the  confidence  in  the  latter  does  not  rest  on  the  same  grounds  as  the 
confidence  in  the  former,  and  cannot  exactly  be  placed  on  a par  with  it. 


CHAP.  V 


VALUE  OF  MONEY 


239 


course  the  use  of  these  substitutes  renders  the  demand*  for 
metallic  money — and  therefore  its  value — less  than  it  would 
have  been,  supposing  metallic  money  alone  available  and  the 
amount  of  exchanges  to  be  mediated  the  same:  but  this  supposi- 
tion is  an  idle  one,  since  the  use  of  bankers’  debts  as  money  is 
an  essential  factor  in  the  development  of  modern  commerce, 
though  the  extent  of  its  effects  cannot  be  exactly  estimated  ^ 
At  any  rate,  so  long  as  every  portion  of  the  aggregate  of  bankers’ 
debts  is  believed  by  the  bankers’  creditors  to  be  convertible  into 
coin  at  will,  its  exchange  value  at  any  given  time  cannot  diverge 

' I may  here  note  an  inconsistency,  pointed  out  by  Cairnes  {Some  Leading 
Principles,  c.  ii.  §§  2,  3),  in  Mill’s  explanation  of  the  term  Demand.  After  laying 
down  generally  (III.  c.  ii.  § 3)  that  “by  demand  we  mean  the  quantity  demanded,” 
he  states,  in  the  special  case  of  money,  that  “ the  demand  for  money  consists 
“of  all  the  goods  offered  for  sale.”  If  this  inconsistency  is  to  be  avoided,  it  is 
on  the  whole  best,  in  my  opinion,  to  measure  demand  for  money  as  well  as  for 
other  things  by  quantity  demanded.  I admit  that  it  is  rather  a strain  on 
language  to  speak  of  a fall  in  prices  as  resulting  from  an  “ increased  ” (or,  as 
I should  say,  “ raised  ”)  “ demand  for  money  ” ; when  the  fact  that  the  phrase 
denotes  is  not  that  the  sellers  want  more  money  for  their  commodities  at  the  old 
rate  of  exchange,  but  that  there  are  more  commodities  to  be  sold  for  whatever 
money  they  will  fetch.  But  it  seems  better  to  submit  to  this  strain  on  ordinary 
language  and  thought  in  the  one  case  of  money,  rather  than  adopt  Cairnes’s 
alternative,  and  measure  demand  for  commodities  generally  by  “ quantity  of 
“purchasing  power  offered  for  them.”  For  this  involves  an  equally  marked,  and 
a more  extensive  and  inconvenient,  divt  ;ence  from  ordinary  usage.  What  men 
commonly  understand  by  an  increase  or  rise  in  the  “ demand  for  a commodity  ” 
is  that  an  increased  amount  of  it  is  demanded  at  the  price  at  which  it  was  selling 
before  the  increase.  No  one  voluntarily  offers  to  give  more  for  anything  than 
he  is  asked  for  it ; if  he  thinks  it  cheap,  he  asks  for  more  of  it,  though  the 
result  of  such  asking,  on  the  part  of  himself  and  others,  may  be  that  the  price 
is  raised  instead  of  the  supply  being  increased. 

2 There  would  seem  to  have  been  some  confusion  in  the  minds  of  those 
writers  on  currency  a generation  ago,  who  insisted  on  the  importance  of 
regulating  the  bank-note  currency  so  as  to  make  it  “conform  exactly  to  a 
“ metallic  standard”  (see  Mill,  Book  III.  c.  xxiv.  § 3).  For  if  they  meant  that 
the  value  of  bank-notes  must  conform  to  the  actual  value  of  the  coin  they 
nominally  represent,  the  result  would  seem  to  be  sufficiently  secured  so  long 
as  the  convertibility  of  the  notes  is  maintained ; while  if  they  desired  to  make 
the  value  of  notes  and  coin  conform  to  what  would  have  been  the  value  of  coin 
if  no  notes  had  been  used,  their  attempt  was  manifestly  chimerical.  It  is 
impossible  to  estimate  the  extent  to  which  the  value  of  gold  would  have  been 
greater  than  it  now  is,  supposing  that  bankers’  (and  merchants’)  obligations  had 
never  been  used  as  substitutes  for  coin ; because  it  is  impossible  to  say  precisely 
how  far  the  actual  development  of  exchange,  which  would  have  occasioned  this 
rise  in  value,  would  have  taken  place  if  the  more  convenient  medium  of  exchange, 
afforded  by  these  obligations,  had  never  come  into  use. 


240 


POLITICAL  ECONOMY 


BOOK  II 


from  the  value  of  the  coin.  Let  us  proceed,  then,  to  consider 
the  causes  determining  the  value  of  metallic  money. 

I have  already  noticed  that  the  term  “ value  of  money”  is 
used  in  two  ways : in  economic  treatises  it  usually  means  the 
purchasing  power  of  money,  or  its  exchange  value  measured  in 
commodities  other  than  money;  in  practical  discussions  about 
the  “ money-market”  it  denotes  the  rate  of  interest  paid  for  the 
temporary  use  of  money.  I shall  presently  discuss  both  the 
confusion  sometimes  made  between  these  different  facts  and 
their  actual  connexion : in  the  mean  time  I shall  avoid  the 
ambiguity  as  far  as  possible. 

Let  us  ask,  then,  on  what  conditions  the  purchasing  power 
of  coin  depends.  In  the  first  place,  it  should  be  observed  that 
when  the  privilege  of  coining  is,  as  it  commonly  is,  monopolised 
by  Government,  it  would  be  possible  for  the  latter  to  raise  the 
value  of  coin  above  what  would  be  sufficient  to  defray  the 
expenses  of  production,  by  limiting  the  amount  coined.  In  fact 
this  course  is  adopted  by  most  modem  Governments,  in  the  case 
of  coins  used  for  very  small  payments  only ; to  these  a value  is 
assigned,  as  representing  a certain  fraction  of  some  higher  coin, 
considerably  above  the  value  of  the  metal  used  in  making  them. 
Such  coins  are  accordingly  called  “ tokens.”  But  no  ci^dlised 
Government  now  adopts  this  plan  in  the  use  of  coins  current  for 
larger  payments : since  on  the  one  hand  any  money  of  which 
the  value  depends  upon  the  limitation  of  its  amount  is  always 
liable  to  be  suddenly  depreciated  by  large  issues,  and  the  result- 
ing danger  of  violent  derangement  in  the  pecuniai^^  relations  of 
all  debtors  and  creditors  has  an  injurious  effect  on  commerce 
and  industry ; while  on  the  other  hand  if  Governments,  through 
necessity  or  cupidity,  are  driven  to  disregard  this  consideration, 
they  now  prefer  the  far  more  profitable  and  hardly  more  dan- 
gerous course  of  issuing  inconvertible  paper-moneyL 

1 Many  economists  appear  to  me,  in  condemning  this  practice  of  “ lowering 
“the  standard,”  to  use  language  calculated  to  mislead.  For  instance.  Mill  speaks 
of  Governments  “robbing  their  creditors  by  the  shallow  and  impudent  artifice... 
“ which  consists  in  calling  a shilling  a pound,  that  a debt  of  a hundred  pounds 
“ may  be  cancelled  by  the  payment  of  a hundred  shiUings.”  These  phrases 
certainly  suggest  the  popular  error  that  a debased  coinage  necessarily  falls  in 
value  in  proportion  to  its  debasement,  even  though  the  supply  of  the  coinage 
is  altogether  under  the  control  of  the  Government.  Whereas  such  fall,  as 
I have  pointed  out,  depends  upon  its  being  issued  in  excess.  At  the  same  time 


CHAP.  V 


VALUE  OF  MONEY 


241 


The  question,  indeed,  that  is  now  practically  discussed  in 
reference  to  coins  is  of  the  opposite  kind ; namely,  whether  it 
is  not  on  the  whole  most  advantageous  for  the  community  to 
coin  not  only  freely  but  gratuitously  for  all  individuals  who 
desire  it,  the  expenses  being  defrayed  by  taxation.  This,  how- 
ever, together  with  the  further  question,  how  the  inevitable  loss 
through  wear  of  the  coins  in  use  is  to  be  made  good,  belongs 
rather  to  the  Art  of  Political  Economy*.  Here  we  will  merely 
assume  that  standard  coins  are  coined  freely  for  any  person  who 
brings  gold  to  the  Government  mint  at  a charge  that  at  any 
rate  does  not  exceed  the  cost  of  the  process ; while  any  serious 
depreciation  of  the  old  coinage,  in  consequence  of  loss  of  weight 
through  wear  or  ill-treatment,  is  prevented  by  the  prohibition  of 
the  use  of  coins  materially  lighter  than  those  issued  by  the  mint. 

In  these  circumstances  we  may,  without  material  error, 
neglect  the  cost  of  coinage  in  considering  how  variations  in 
the  value  of  coin  will  be  determined ; and  regard  these  as 
depending  entirely  on  variations  in  the  value  of  the  metal 
used  for  standard  coins.  We  will  assume  in  the  first  instance 
that  only  one  metal,  gold,  is  so  used;  and,  for  simplicity,  we 
will  suppose  that  over  the  whole  region  which  we  are  con- 
sidering gold  tends  to  have  the  same  value,  allowing  for  cost  of 
carriage  from  the  mines.  This  supposition  is  not  far  from 
true  of  the  economically  most  advanced  parts  of  the  civilised 
world,  united  by  active  commercial  intercourse.  Though, 
strictly  speaking,  as  we  have  seen  in  the  last  chapter  but  one, 
we  have  to  consider  not  a single  but  a double  cost  of  carriage, 
which,  in  this  as  in  other  cases,  may  be  divided  unequally 
between  the  trading  countries ; and  we  have  also  to  take 
account  of  the  fact  that  a country  does  not  merely  receive 

it  is  to  be  observed  that  an  amount  may  be  excessive  after  debasement  which 
was  not  so  before;  as  a certain  dislike  of  the  coin  is  produced  by  the  know- 
ledge of  its  debasement,  and  this,  together  with  the  impossibility  of  using  it 
for  foreign  payments,  tends  to  diminish  the  demand  for  it. 

It  should  be  added  that  the  value  of  token  coins  is  not  liable  in  the  same 
way  to  depreciation  through  excessive  issue ; since  the  value  of  a token  is 
intended  to  be  determined  entirely  by  that  of  the  more  valuable  coin,  to  a certain 
fraction  of  which  it  is  declared  equivalent.  If,  however,  such  coins  were  issued  in 
great  excess,  they  might  perhaps  be  used  to  some  extent  in  payments  of  a larger 
amount  than  that  for  which  they  are  legally  current ; and  as  so  used,  they  would 
have  a depreciated  value. 

* Cf.  post.  Book  III.  c.  iv.  § 5. 

S.  P.  E. 


16 


242 


-POLITICAL  ECONOMY 


BOOK  II 


gold  as  an  export  froijj  countries  where  gold-mining  is  carried 
on ; it  may  also  receive  it  in  payment  of  debts  from  any 
other  country  with  which  it  is  in  commercial  relations.  Under 
these  complex  conditions,  all  that  we  can  say  generally  is 
(1)  that  the  value  of  gold  in  a country  where  there  are 
no  gold-mines  will  tend  to  be  in  excess  of  its  value  in  a 
country  from  which  it  is  profitable  to  import  it,  by  some 
portion  of  the  double  cost  of  carrjung  gold  one  way  and 
some  kind  of  goods  the  other  way ; and  (2)  that  in  propor- 
tion as  the  products  of  a country'  are  keenly  demanded  abroad, 
this  excess  will  tend  to  he  reduced.  Hence  any  change  in 
the  conditions  of  trade  may  modify  somewhat  the  value  of 
gold  in  a particular  district,  without  equally  affecting  its  value 
elsewhere.  But  in  the  present  discussion  it  is  best  to  ignore 
these  minor  changes  in  local  values ; and  to  suppose  the  value 
of  gold  to  change  uniformly  over  the  region  contemplated,  as 
would  be  approximately  the  case  in  an  isolated  country-  supplied 
from  its  own  mines. 

§ 2.  In  the  first  place,  gold,  like  other  products  of  extractive 
industry,  is  a commodity  produced  simultaneously  at  verj' 
different  costs ; the  cost  of  the  least  remunerative  portion  of 
its  production  tending  to  increase — so  long  as  other  things 
remain  the  same— as  the  total  amount  produced  increases.  As 
we  have  seen,  so  far  as  industrial  competition  operates,  the  value 
of  such  commodities  will  be  affected — not  only  transiently  but 
to  some  extent  permanently^ — -by  any  change  either  in  the 
conditions  of  supply  or  in  those  of  demand ; a rise  in  the 
demand,  other  things  remaining  the  same,  tends  to  raise  the 
value  because  the  sujipl}"  cannot  be  correspondingly  increased 
without  having  recourse  to  more  expensive  production ; and  any 
increase  in  cost  of  the  least  remunerative  part  of  the  pro- 
duction, demand  remaining  unchanged,  mil  tend  to  have 
ultimately  a similar  effect.  Hitherto,  however,  the  action  of 
industrial  competition  has  been  particularly  irregular  in  the 
case  (jf  gold ; owing  to  the  various  and  uncertain  nature  of 
the  returns  of  the  industry,  and  to  the  fact  that  the  working  of 
alluvial  deposits — from  which  a very  large  part  of  the  gold  in 
the  world  has  been  derived — can  generally  be  carried  on  with 
very  little  capital.  Further,  in  consequence  of  the  great 
durability  of  gold,  and  the  fact  that  the  gold  used  as  money 


CHAP.  V 


VALUE  OF  MONEY 


243 


is  pi’actically  always  in  the  market,  aii^  change  in  the  cost 
of  production  of  the  metal  is  likely  to  take  a long  time 
to  produce  its  full  effect  on  exchange  value.  “ Hence  the 
“ effects  of  all  changes  in  the  conditions  of  production  of  the 
“precious  metals  are  at  first,  and  continue  to  be  for  many 
“ years,  questions  of  quantity  only,  with  little  reference  to  cost 
“ of  production”*. 

Let  us  then  consider  how  the  value  of  a given  quantity 
of  gold  will  be  affected  by  the  conditions  of  demand.  The 
total  demand  for  gold  is  composed,  in  an  advanced  in- 
dustrial community,  mainly  of  two  elements,  which  have  to  be 
kept  distinct  in  considering  the  causes  of  its  variations:  (1)  the 
monetary  demand,  including  the  demand  for  bullion  as  the 
metallic  money  of  international  trade ; and  (2)  the  demand  for 
ornamental  or  technical  use.  Any  rise  (or  fall)  in  either  demand 
must  affect  the  value  of  the  whole ; but  it  will  obviously  affect 
it  to  a less  extent  than  if  there  were  only  one  kind  of  demand, 
as  its  effect  will  be  partly  counteracted  by  the  reduction  (or 
extension)  in  the  other  demand,  consequent  on  the  change  in 
value.  We  may  assume  of  course  that  both  demands  alike 
exhibit  the  general  relation  of  demand  to  value,  extending  as 
the  latter  falls  and  shrinking  as  it  rises;  but  so  far  as  the 
demand  for  ornamental  or  technical  uses  is  concerned  we  have 
no  reason  to  assume  any  particular  quantitative  relation  between 
a given  change  in  value  and  the  consequent  change  in  extent  of 
demand. 

The  case  is  different  with  the  monetary  demand.  But 
before  analysing  this  more  minutely,  I must  notice  a third  kind 
of  demand,  comparatively  unimportant  in  an  advanced  stage  of 
industrial  development,  but  very  important  at  lower  stages, — 
I mean  the  demand  for  hoarding.  It  is  somewhat  difficult  to 
distinguish  it  sharply  from  either  of  the  other  two  kinds  of 
demand:  for  (1)  in  the  stage  of  economic  development  in  which 
hoarding  takes  place  to  a considerable  extent,  ornaments  of 
gold  and  silver  are  often  partly  valued  as  ^ form  of  hoarding ; 
and  (2)  on  the  other  hand,  it  is  difficult  to  draw  a sharp  line 
between  hoarding  coin  and  keeping  it  for  current  use,  since 
what  is  hoarded  is  intended  to  be  used  sometime  as  a means  of 

* Mill,  Political  Econoviy,  III.  c.  ix.  § 2. 

16—2 


244 


POLITICAL  ECONOMY 


BOOK  II 


obtaining  other  wealth.  This  latter  difficulty  may  be  illustrated 
by  the  fact  that  some  economists  class  bank-reserves  of  gold 
with  hoards ; and,  no  doubt,  such  reserves  are  kept  for  security 
against  needs  that  may  never  arise — and  which,  certainly,  the 
bankers  hope  to  avoid  altogether.  Nevertheless  this  classification 
seems  to  me  misleading;  since  the  employments  of  gold  thus 
placed  together  are  as  unlike  as  possible  in  their  real  relations 
to  the  ordinary  monetary  work  of  gold : for  gold  hoarded  is — 
for  the  time  at  least — withdrawn  from  this  work,  whereas  gold 
kept  in  bank-reserves,  by  sustaining  the  convertibility  of 
bankers’  debts,  indirectly  performs  monetary  work  in  a higher 
degree  than  coin. 

In  short,  the  monetary  utility  of  gold,  as  an  internal  medium 
of  exchange,  has  to  be  viewed  in  relation  to  two  distinct  uses : 
(a)  the  use  of  coin  for  mediating  directly  in  certain  transfers  of 
wealth,  generally  of  small  amounts ; and  (6)  the  use  of  coin  or 
bullion  as  the  basis  of  a medium  of  exchange  currently  accepted 
as  equivalent  to  coin  but  larger  in  quantity  than  the  gold  which 
sustains  its  convertibility, — larger  in  varjdng  degrees,  according 
to  the  nature  of  the  system  for  supplying  substitutes  for  gold. 
Now  it  is  clear  that  a mere  change  in  the  value  of  gold, 
consequent  on  a change  in  its  quantity,  has  no  general  tendency 
— supposing  other  things  unchanged — to  affect  the  relative 
proportions  in  which  coin  and  its  substitutes  are  respectively 
used ; since  the  value  of  such  substitutes,  supposing  their 
convertibility  complete,  must  rise  and  fall  pari  passu  ■with  that 
of  coin.  Nor,  again,  supposing  the  exchanges  of  commodities 
requiring  the  mediation  of  money  to  remain  constant,  has  a 
change  in  the  quantity  of  gold  any  tendency  to  affect  the 
monetary  efficiency  of  coin  or  its  substitutes  in  the  way  of 
altering  their  “rapidity  of  circulation,” — i.e.,  altering  the  number 
of  exchanges  in  which  the  same  coin  or  debt  is  used  over  again 
■within  a given  time.  Hence,  so  far  as  the  quantities  and 
relative  values  of  the  commodities  exchanged  remain  the  same, 
the  quantity  of  gold  demanded  for  the  work  of  mediating 
exchanges  may  be  taken  to  vary  simply  in  reverse  ratio  to 
its  purchasing  pow6r, — for  the  obrious  reason  that,  as  the  price 
of  anything  rises,  a proportionally  la.rger  amount  of  money  is 
required  to  buy  it. 

Now  actually,  of  course,  the  work  that  money  has  to  do  is 


CHAP.  V 


VALUE  OF  MONEY 


245 


continually  undergoing  some  change ; and  any  change  in  the 
quantity  of  gold  in  a country  is  sure  to  coincide  with  changes 
in  the  supply  of  commodities  of  all  kinds  for  purchase.  It 
seems,  however,  clear  that  the  mere  fact  that  the  quantity  of 
money  in  a country  is  altered  cannot  have  in  itself — i.e.,  apart 
from  any  change  in  the  proportions  in  which  it  is  distributed — 
any  tendency  to  alter  the  quantities  or  relative  values  of  the 
commodities  which  are  bought  and  sold  for  money,  so  far  as 
the  terms  of  exchange  are  settled  subsequently  to  the  alteration 
by  comnetition  and  not  by  custom.  But  such  exchanges  will 
not  constitute  the  whole  of  the  work  that  the  altered  quantity 
of  money  has  to  perform.  Even  if  we  leave  mere  custom  out  of 
account,  an  important  part  of  this  work  will  consist  in  the 
liquidation  of  debts  and  other  payments  fixed  prior  to  the 
change  and  unaffected  by  it : hence  a fall  in  the  purchasing 
power  of  coin,  consequent  on  an  increase  in  its  quantity,  will  be 
proportionally  favourable  to  all  borrowers  of  money  and  all 
persons  whose  income  varies  continually  with  the  market  value 
of  their  services.  In  the  present  state  of  society,  therefore, 
such  a fall  must  be  importantly  favourable  to  persons  engaged 
in  industry,  especially  to  the  employers  of  capital  in  whole- 
sale trade,  since  such  persons  are  habitually  extensive  borrow- 
ers* ; and  it  must  consequently  tend  to  encourage  industrial  en- 
terprise. In  this  way  the  effects  of  an  increase  in  the  proportion 
of  gold  to  commodities  may  be  somewhat  reduced,  or  at  least 
spread  over  a longer  period,  by  the  stimulus  to  industry  which 
the  transition  from  the  smaller  to  the  larger  relative  quantity 
gives;  and  a decrease  may  similarly  act  as  a discouragement. 
Again,  in  other  ways  the  actual  process  of  change  in  quantity 
of  gold  may  alter  sensibly  the  distribution  of  wealth,  and  thus 
to  some  extent  modify  the  work  that  money  has  to  do  even  in 
the  way  of  mediating  exchanges.  For  instance,  when  an 
important  increase  occurs  in  the  quantity  of  gold  in  a country 
through  the  opening  of  new  sources  of  supply,  the  new  supplies 
do  not  act  uniformly  on  the  prices  of  things  and  services.  They 
tend  to  raise  first  the  wages  and  profits  of  persons  engaged 

* The  six  hundred  millions  of  money— or  thereabouts — that  the  bankers  of 
the  United  Kingdom  owe  to  other  members  of  the  community  is  mainly  balanced 
by  debts  which  traders  or  other  producers  have  incurred  to  the  banks  ; partly  by 
discounts  of  bills,  partly  by  loans  and  overdrafts. 


246 


POLITICAL  ECONOMY 


BOOK  ir 


in  gold-mimng,  then  the  prices  of  commodities  specially  con- 
sumed by  them — raising  these  latter  unequally,  according  to 
the  different  conditions  under  which  they  are  produced — and 
I thus  to  flow  with  varying  degrees  of  rapidity  into  different 
channels  of  exchange ; and  it  is  quite  possible  that  some  of  the 
i changes  in  the  distribution  of  wealth,  that  thus  tend  to  ac- 
company a material  increase  in  the  proportion  of  gold  to 
commodities,  may  also  cause  a material  change  in  the  need  of 
the  community  for  coin.  For  example,  they  may  increase  the 
share  of  produce  that  is  divided  into  small  incomes,  whose 
possessors  chiefly  use  coin  in  making  their  purchases,  at  the 
expense  of  the  share  of  the  wealthier  classes,  who  chiefly  use 
bankers’  obligations h In  short,  we  cannot  affirm  more  than  that, 
in  assuming  the  monetary  work  of  gold  to  remain  unchanged 
by  a change  in  its  quantity,  and  inferring  that  the  monetary’  de- 
mand for  gold  will  tend  to  expand  or  shrink  in  simply  inverse 
proportion  to  the  fall  or  rise  in  its  value,  we  get  a result  which 
must  in  all  cases  be  useful  as  a first  approximation  to  the  actual 
effect  of  the  change  considered ; though  it  will  probably  always 
require  to  be  corrected  by  taking  into  account  minor  effects, 
varying  according  to  the  special  nature  and  circumstances  of 
the  change. 

§ 3.  In  the  pi-eceding  section  I have  considered  how  a 
change — say,  for  definiteness,  an  increase — in  the  amount  of 
gold  tends  to  affect  its  value,  supposing  the  monetary  work  that 
it  has  to  do  to  remain  unchanged.  It  is  obvious  that  if  re- 
versing the  hypothesis,  we  suppose  the  quantity  of  gold  to 
remain  unchanged,  while  the  monetary  work  done  by  it 
decreases,  the  effect  on  its  value  would  be  similar : the 
exchange  value  of  gold  relatively  to  commodities  in  general 
must  clearly  be  affected  by  a change  in  the  quantit}'  of  com- 
modities in  general  offered  for  sale, — consequent  (let  us  say)  on 
a change  in  the  numbers  or  average  wealth  of  the  community 
in  question — no  less  than  by  a change  in  the  quantity  of  gold 
in  monetary  use'®.  And,  actually,  the  value  of  gold  which  we 

' Cairnes  has  argued  {Essays  in  Political  Economy,  p.  130)  that  the  addition 
of  40  per  cent,  to  our  gold  currency  between  1851  and  1859  was  prevented  from 
affecting  prices  as  much  as  it  would  otherwise  have  done,  owing  to  the  increase 
in  the  real  incomes  of  the  industrial  classes  in  England  that  took  place  simul- 
taneously with — and  partly  in  consequence  of — the  increased  production  of  gold. 

2 It  is  necessary  to  draw  attention  to  this  obvious  truth ; since  it  seems 


CHAP.  V 


VALUE  OF  MONEY 


247 


have  to  explain  is  almost  always  a relation  between  a changing 
quantity  of  gold  in  monetary  use,  and  changing  quantities  of 
commodities  exchanged  for  it.  But  as  soon  as  we  consider 
this  latter  kind  of  change,  we  have  to  face  the  difficulties, 
noticed  in  a previous  chapter^  of  measuring  changes  in  the 
value  of  gold  relatively  to  commodities  in  general,  when 
the  particular  articles  that  make  up  this  aggregate  are  under- 
going changes  in  value  relatively  to  each  other,  and  also  in 
the  quantities  exchanged  within  a given  period.  I pointed 
out  that  under  these  conditions — which  are  always  the  actual 
conditions — the  question  “ how  much  the  general  purchasing 
“ power  of  money  has  changed  within  a given  period  ” does 
not  admit  (except  by  accident)  of  a completely  definite 
answer.  For,  to  answer  it  precisely,  we  have  to  determine  the 
relative  quantities  of  the  particular  commodities  which  make 
up  the  aggregate  of  “ commodities  in  general  ” , and,  as  the 
quantities  purchased  at  the  beginning  of  the  period  have  as 
much  claim  to  be  selected  as  those  purchased  at  its  close,  the 
selection  must  be  arbitrary.  And  the  element  of  inevitable 
uncertainty  in  the  very  conception  of  a change  in  the  standard 
of  value  is  increased  if  the  qualities  of  commodities  have 
changed  within  the  period  in  question;  especially  if  the  pro- 
gress of  industry  has  introduced  some  entirely  new  articles, 
while  some  old  ones  have  fallen  out  of  use  altogether.  But 
further,  there  is  some  difficulty  in  determining  precisely  what 
commodities  are  to  be  taken  for  comparison  with  gold.  In 
Book  I.  c.  ii.,  where  I was  considering  value  as  a measure  of 
the  wealth  of  a community,  I proposed  to  confine  our  attention 
to  “ consumers’  commodities,”  in  making  up  the  price-lists  for 
calculating  changes  in  the  purchasing  power  of  money.  My 
ground  for  this  limitation  was  that  a change  in  the  price  of 
“producers’  commodities” — instruments  or  materials  of  produc- 
tion— only  interests  the  consumer  so  far  as  it  is  the  forerunner 
of  a change  in  the  price  of  directly  consumable  commodities. 
For  example,  if  the  coal  used  by  producers  becomes  dearer  there 


to  be  often  overlooked  by  persona  who  argue  that,  though  “prices” — in  gold — 
“ have  fallen,”  the  fall  is  not  due  to  a change  “ in  the  value  of  gold  ” ; while 
yet  they  do  not  definitely  explain  “ value  ” to  mean  anything  different  from 
“ exchange  value  relatively  to  commodities  in  general.” 

1 Book  I.  c.  ii.  § 3.  ^ 


248 


POLITICAL  ECONOMY 


BOOK  II 


will  tend  to  be  a material  rise  in  the  price  of  thingB  in  the 
production  of  which  coal  is  extensively  used,  and  a correspond- 
ing reduction  in  their  supply : and  when  this  change  has  taken 
place,  the  purchasing  power  of  (consumers’)  money  will  have 
correspondingly  fallen,  so  that  the  effect  of  the  rise  in  the  price 
of  producers’  coal  will  be  thus  indirectly  represented.  And  it 
is,  I conceive,  only  in  this  way  that  it  ought  to  be  represented 
when  we  are  considering  what  a change  in  the  value  of  gold  is 
to  mean,  for  members  of  the  community  generally. 

The  case  is  different  when  we  ask  what  such  a change 
means  from  a trader’s  point  of  view,  or  when  we  are  considering 
how  changes  in  the  value  of  gold  are  caused  by  changes  in 
'supply  or  demand.  For  in  the  former  case  we  must  theoretically 
regard  all  the  articles  of  trade  as  of  equal  importance,  in  pro- 
portion to  the  aggregate  value  of  each : and  in  the  latter  case 
we  must  take  into  account  the  whole  demand  for  money — the 
whole  monetary  work  that  gold  has  to  do — and,  therefore,  the 
demand  constituted  by  producers’  as  well  as  by  consumers’  com- 
modities. It  must,  however,  be  borne  in  mind  that  if  in  esti- 
mating a change  in  the  purchasing  power  of  gold  we  take  into 
account  all  the  commodities — including  “ securities  ” — for  which 
it  is  exchanged,  we  get  an  average  result  which  has  little 
practical  interest  for  any  one.  No  producer’s  interests  are 
affected  by  a change  in  the  purchasing  power  of  gold  relatively 
to  commodities  which  he  does  not  use,  except  so  far  as  the 
change  affects  the  aggregate  price  paid  for  such  commodities, — 
which  may  or  may  not  be  the  case  according  to  the  special 
conditions  of  demand  for  such  commodities.  Hence,  though 
a change  in  the  general  purchasing  power  of  gold  may  be 
caused  by  a change  in  the  quantity  of  commodities  in  general 
just  as  much  as  by  a change  in  the  quantity  of  gold,  the  latter 
cause  of  change  has  much  more  general  interest  for  producers 
than  the  former,  which  only  interests  them  so  far  as  the  com- 
modities in  question  are  articles  which  they  use  or  substitute 
for  their  own  products : and  in  measuring  the  actual  effect  of  a 
change,  however  caused,  I do  not  conceive  that  there  vdll  be  any 
practical  advantage  in  deviating  from  the  standard  previously 
suggested*. 

* Some  further  discussion  of  this  question,  regarded  from  a practical  point 
of  view,  will  be  found  in  Book  III.  c.  iv.  § 6. 


CHAP.  V 


VALUE  OF  MONEY 


249 


I 4.  I now  pass  to  consider  an  essentially  dift'erent  cause 
of  changes  in  the  value  of  gold ; a cause,  however,  whose  effects 
are  often  difficult  to  separate  from  those  of  the  causes  just 
discussed.  Hitherto  I have  assumed  the  general  tendency  to 
use  substitutes  for  gold — either  bankers’  promises  to  pay  on 
demand  or  traders’  promises  to  pay  at  a certain  future  date — to 
remain  unchanged.  Of  course  any  important  development  of 
the  banking  system — or,  more  generally,  of  the  use  of  substitutes 
for  metallic  money — in  any  society  must  by  diminishing  the 
demand  for  metallic  money  render  its  purchasing  power  less, 
and  prices  consequently  higher,  than  would  otherwise  be  the 
case : and  a similar  result  will  be  produced  at  least  temporarily 
by  any  extension  of  the  use  of  credit  in  purchases,  even  if  it  be 
only  the  credit  given  by  traders.  Now  in  times  of  commercial 
hopefulness  and  confidence,  which  appear  to  succeed  times  of 
dullness  and  despondency  with  a certain  periodicity*,  such  an 
extension  of  credit  in  all  ways — including  the  use  of  substitutes 
for  metallic  money^ — tends  to  take  place ; and  as  prices  rise  in 
consequence,  the  purchasing  power  of  gold  falls,  without  any 
real  change  in  the  relation  between  the  quantity  of  gold  and 
the  supply  of  other  commodities.  There  has  been  much  con- 
troversy— especially  just  before  and  after  the  passing  of  the 
English  Bank  Charter  Act — as  to  the  part  taken  by  bankers  in 
these  transient  “ inflations  ” : but  it  is  now,  I conceive,  generally 
admitted  that  this  is  only  of  a secondary  and  subordinate  kind. 
Where  banking  expedients  are  familiar  and  easily  accessible, 
a banker  cannot,  by  the  mere  act  of  making  a large  loan  in  his 
own  notes,  induce  anyone  to  use  notes  who  would  otherwise 
have  used  coin ; any  more  than  he  can  induce  traders  to  give 
more  bank-money  for  goods  than  they  believe  them  to  be 
worth  in  gold.  At  the  same  time,  banks  can  undoubtedly 
enable  merchants  to  act  on  mistaken  beliefs  that  goods  are,  or 
are  about  to  be,  worth  more  in  gold  than  will  prove  to  be  the 
case ; and  in  consequence  to  make  extended  purchases  and  raise 
prices.  And  in  this  way,  they  render  possible  alternations  of 
inflated  and  depressed  prices,  which  could  not  occur  if  everything 
were  paid  for  in  hard  coin  and  no  credit  were  given,  and  could 

* I do  not  quite  think  that  the  “ decennial  credit  cycle  ” is  so  definite  and 
permanent  a fact  as  Jevons  considers  it  (Investigations  in  Currency  and  Finance, 
vi.,  vii.,  and  viii.) : but  his  arguments  are  worthy  of  attention. 


250 


POLITICAL  ECONOMY 


BOOK  II 


not  occur  to  so  great  an  extent,  even  if  merchants  gave  credit 
as  at  present,  if  there  were  no  such  possibility  as  the  banking 
system  affords  of  increasing  the  generally  accepted  medium 
of  exchange'.  How  far  it  is  desirable  that  Government  should 
control  the  operations  of  banks,  with  the  view  of  preventing 
these  fluctuations  in  prices,  is  a practical  question  that  does  not 
now  concern  us ; but  it  may  be  observed  that  at  any  rate  the 
banks  have  no  interest  in  producing  the  mistaken  beliefs  that 
tend  to  inflate  prices.  No  doubt  they  profit  by  them  directly 
through  the  greater  demand  for  their  commodity ; but  the 
danger  of  the  collapse  when  the  mistake  is  discovered  decidedly 
outweighs  this  gain. 

However  this  may  be,  it  is  of  course  true  that  when  a 
buoyant  state  of  trade  causes  more  money  to  be  required  for  the 
more  numerous  and  extensive  purchases  of  goods  that  are  then 
made,  the  demand  of  traders  for  money  supplied  by  bankers 
rises ; and  here  as  in  other  cases  the  rise  in  demand  tends 
to  cause  at  least  a temporary  rise  in  value  of  the  commodity 
demanded.  But  it  must  now  be  observed  that  the  rise  thus 
caused  is  not  primarily  a rise  in  the  “ value  of  money,”  in  the 
sense  in  which  we  have  been  investigating  it,  since  the  trader 
does  not  commonly  purchase  with  goods  the  money  he  requires ; 
it  is  a rise  in  what  for  distinction’s  sake  I have  proposed  to 
call  the  “ value  of  the  use  of  money,”  i.e.,  the  rate  of  interest  on 
loans  of  money  I I have  already  noticed  that  in  the  discussion 
of  this  latter  value  we  are  liable  to  find  a double  confusion ; or 
rather  two  difi'erent  confusions,  made  by  two  different  sets  of 
persons.  The  exchange  value  of  the  use  of  money,  estimated 
in  money,  is  more  or  less  vaguely  confounded  by  practical  men 
with  the  exchange  value  of  money  relatively  to  goods ; and  it  is 

' It  is  to  be  observed  that  as  all  purchases  in  wholesale  trade  are  customarily 
made  on  credit,  any  extension  of  purchases  involves  in  the  first  instance 
chiefly  an  extension  of  trader^'  obligations  to  pay  money  at  a future  date.  Hence 
the  extended  use  of  bankers’  obligations  occurs  somewhat  later  than  the  rise  in 
prices,  which  it  sustains  rather  than  produces. 

^ The  money  given  for  a bill  of  exchange — that  is,  for  an  obligation  to  pay 
money  at  a future  date — is  substantially  lent  by  the  banker : though  Mr  Macleod 
is  no  doubt  correct  in  pointing  out  that  the  transaction  is  formally  a purchase 
and  not  a loan.  The  uncommercial  reader  should  take  note  that  as  the  money 
paid  for  such  a bill  is  equal  to  the  amount  of  the  bill  with  the  discount 
subtracted,  the  rate  of  interest  obtained  by  the  banker  on  this  money  is  a little 
higher  than  the  rate  of  discount. 


CHAP.  V 


VALUE  OF  MONEY 


251 


more  definitely  and  deliberately  identified  by  Mill  and  other 
economists  with  the  rate  of  interest  on  capital  generally.  The 
grounds  for  this  latter  identification  are  obvious  and  plausible, 
and  at  first  sight  may  easily  appear  conclusive.  Since  it  is  the 
essential  characteristic  of  money  that  it  is  continually  being 
exchanged  for  all  other  kinds  of  wealth,  how — it  may  be 
asked — can  competition  possibly  lead  to  the  payment  of  a price 
for  the  use  of  money,  different  from  that  which  is  paid  for  the 
use  of  any  portion  of  such  capital ; supposing,  of  course,  that 
the  capital  itself  is  estimated  at  its  money  value  ? The  answer 
to  this  question  is  somewhat  complicated.  In  the  first  place,  it 
must  be  remembered  that  interest  on  capital  generally,  as  it 
was  before  defined,  has  to  be  kept  carefully  distinct  from  the 
other  element  of  profit  which  goes  to  remunerate  the  labour  of 
managing  capital.  When  money  is  borrowed  from  the  public  for 
a long  period  or  for  permanence,  by  Governments  or  gi-eat  joint- 
stock  companies,  the  price  paid  to  the  lenders  for  the  use  of  it 
may  be  regarded  as  entirely  interest  in  this  technical  sense;  since 
such  lenders  do  not  generally  obtain  any  remuneration  for  the 
trouble  of  looking  after  their  investments.  But  loans  made  for 
short  periods  by  professional  lenders  of  money  must  yield  the 
latter  some  “wages  of  management”  as  well  as  strict  interest;  on 
this  ground,  therefore,  we  might  expect  the  rate  of  discount  on 
bills  of  exchange  to  be  higher  than  the  rate  of  interest  on  capital 
generally.  On  the  other  hand,  we  have  to  consider  that  the 
banker  to  a great  extent  produces  the  money  he  lends,  namely, 
his  own  obligations,  which  so  long  as  his  business  flourishes 
he  is  practically  never  compelled  to  redeem’ ; and  that  he  may 
easily  afford  to  sell  the  use  of  this  commodity  at  a price  mate- 
rially less  than  the  rate  of  interest  on  capital  generally.  Hence 
so  far  as  he  increases  the  extent  and  security  of  his  business 
by  lending  his  money  chiefly  to  traders  for  short  periods,  com- 
petition may  force  him  to  make  such  loans  at  a rate  not  above 
— or  even  below — that  of  ordinary  interest  on  capital  perma- 
nently, though  not  less  safely,  invested.  And  this  seems  to  be 
actually  the  case ; partly,  perhaps,  because  traders  are  specially 
important  customers  of  banks ; but  chiefly  because  it  is  con- 
venient for  bankers  to  lend  money  which  the  borrowers  are 

’ That  is,  the  amount  he  is  continually  called  upon  to  redeem  is  balanced  by 
the  amount  that  he  is  able  to  lend  afresh. 


252 


POLITICAL  ECONOMY 


BOOK  II 


bound  to  repay  after  definite  short  intervals,  in  order  that  they 
may  at  any  time  reduce  easily  the  amount  they  have  out  on 
loan,  if  exceptionally  large  payments  are  required  of  them. 
Thus  we  have  no  ground  for  saying  a priori  that  the  rate  of 
discount  charged  by  bankers  on  mercantile  bills  will  be — even 
on  the  average  and  after  all  allowance  for  differences  of  risk — 
the  same  as  the  rate  of  interest  on  capital  generally : there  is 
no  economic  reason  why  it  should  not  be  more  than  this,  since 
the  banker  has  to  be  remunerated  for  his  trouble ; and,  on  the 
other  hand,  there  is  no  reason  why  it  should  not  be  materially 
less,  if  the  value  of  the  advantages  above-mentioned  is  consider- 
able, since  a comparatively  low  rate  of  interest  on  the  medium 
of  exchange  inexpensively  produced  by  the  banker  himself  would 
be  sufficient  to  give  him  normal  profit  on  his  banking  capital  L 

It  should  be  observed  that,  so  far  as  money  is  lent  profession- 
ally by  persons  outside  the  banking  system,  interest  on  loans  for 
short  periods  will  generally  be  higher  than  interest  on  capital 
or  “ money  invested  ” permanently,  because  it  must  furnish  the 
money-lender  wth  remuneration  for  his  trouble  as  well  as  in- 
terest on  his  capital.  And  the  discredit  that  has  often  been 
attached  to  the  money-lender’s  business  must  of  course  tend 
to  raise  the  price  of  his  loans  still  further  ; such  discredit 
being  largely  due  to  the  fact  that  such  borro%ving  is  often 
an  expedient  to  which  producers  and  consumers  alike  resort 
in  occasional  emergencies  or  in  consequence  of  unthrift ; so 
that  the  money-lender  is  in  the  invidious  position  of  making 
a profit  out  of  the  calamities  or  vices  of  his  fellow-men. 

We  may  conclude,  then,  that  even  the  average  rate  of 
interest  or  discount  current  in  the  money-market  will  not 

* The  average  Bank  of  England  rate  of  discount  on  fir.st-class  short  bills  for 
the  ten  years  1869 — 1878,  inclusive,  was  £3.  8s.  Id.,  which  is  equivalent  to  a rate 
of  interest  per  cent,  of  £3.  10s.  6(i. ; and  I understand  that  the  average  market- 
rate  of  discount  on  first-class  bills  was  decidedly  less  during  the  same  period. 
(See  Palgrave,  Bank-rate  in  England,  France,  and  Germany,  c.  5.)  It  would 
seem,  therefore,  that  the  interest  obtained  by  bankers  generally  on  the  money 
invested  in  such  bills  has  been  materially  less  than  the  interest  obtainable  during 
the  same  period  on  permanent  investments  of  as  high  a degree  of  security — such 
as  first-class  mortgages  or  the  bonds  of  the  great  railway  companies.  And  so 
far  as  banks  lend  money  for  longer  or  more  indefinite  periods,  as  “ advances  on 
“securities,”  they  always,  I believe,  charge  interest  considerably  above  that 
charged  in  discounting  the  best  mercantile  bills.  Hence  in  the  argument  in  the 
text  I have  confined  my  statements  to  the  rate  of  discount  on  bills. 


CHAP.  V 


VALUE  OF  MONEY 


253 


generally  tend  to  coincide  with  the  average  yield  of  invested 
capital.  And  the  divergences  between  the  fluctuations  of  the 
two  rates  will  probably  be  still  more  marked ; since  the  rate  of 
discount  is  immediately  acted  on  by  vicissitudes  of  trade  which 
only  affect  the  other  rate  secondarily,  and,  in  ordinary  cases, 
comparatively  slightly.  The  two  rates,  however,  will  ceteris 
paribus  tend  to  rise  and  fall  together ; since  a fall  in  the  yield 
of  investments  generally,  other  things  remaining  the  same,  will 
induce  bankers  to  purchase  bills  at  a lower  rate  of  discount, 
as  they  wll  gain  less  by  investing  in  other  securities,  and  will 
render  the  borrowers  of  their  money  less  disposed  to  pay  the 
old  price  for  its  use ; and  similarly  a fall  in  the  rate  of  discount, 
occurring  independently  of  a fall  in  the  yield  of  capital  gene- 
rally, will  increase  the  inducement  to  buy  and  decrease  the 
inducement  to  sell  securities  3delding  a fixed  return;  and,  there- 
fore, will  cause  a fall  in  the  rate  of  interest  actually  received  on 
such  investments. 

§ 5.  The  other  confusion  of  which  I spoke,  between  the 
rate  of  interest  on  loans  of  money  and  the  power  of  money  to 
purchase  goods,  has  never  been  defended  by  any  economist : 
and  it  is  easy  to  shew  that  the  two  values  in  question  often 
tend  to  vary  in  opposite  directions.  For  an  active  demand  for 
discounts  on  bills  or  advances  from  bankers  tends,  as  I have 
said,  to  raise  the  value  of  the  use  of  money ; but  so  far  as  such 
money  is  mostly  wanted  to  pay  for  extended  purchases  of  goods, 
the  increased  supply  and  more  active  employment  of  it  is 
generally  accompanied  by  a rise  in  the  price  of  the  latter  and 
therefore  by  a fall  in  the  purchasing  power  of  money  relatively 
to  goods.  Similarly  in  slack  times,  when  bankers  have  to  make 
loans  at  very  low  rates,  the  purchasing  power  of  money,  rela- 
tively to  goods,  is  likely  to  be  high ; money  is  at  such  times 
said  to  be  “ plentiful,”  but  what  is  meant  by  this  is  that  the 
amount  that  bankers  have  to  lend  is  larger  than  usual  relatively 
to  the  demand ; and  since  there  is  a general  lack  of  enterprise  in 
trade  and  in  the  industrial  investment  of  capital,  the  demand 
for  loans  is  likely  to  be  small  in  comparison  with  the  amount  of 
production  of  goods. 

At  the  same  time,  there  are  certain  connexions  between  the 
purchasing  power  of  money  and  the  rate  of  discount,  which  go 
some  way  to  explain,  though  hardly  to  justify,  the  common 


254 


POLITICAL  ECONOMY 


BOOK  II 


confusion  between  the  two  meanings  of  “ value  of  money.” 
It  must  be  borne  in  mind  that  money  is  largely  employed 
in  buying  not  merely  the  consumable  products  and  materials 
of  production  which  we  call  “ goods,”  but  also  land,  houses,  and 
other  portions  of  capital  with  a view  to  interest ; especially  the 
debts  of  Governments  and  joint-stock  companies,  and  shares 
of  the  capital  owned  by  such  companies,  which  we  call  by  the 
general  name  of  “securities.”  Now  a fall  in  the  rate  of  discount 
will,  as  we  have  seen,  tend  to  be  accompanied  by  a rise  in  the 
selling  price  of  such  investments ; that  is,  by  a fall  in  the 
purchasing  power  of  money  relatively  to  securities  generally 
(varying  in  degree,  according  as  the  securities  are  more  or 
less  negotiable).  Thus  when  money  is  “cheap,”  in  the  ordinary' 
commercial  sense,  i.e.,  when  discount  is  low,  securities  will 
ceteris  paribus  be  dear ; and  thus  the  rate  of  discount  and  the 
purchasing  power  of  money  will  naturally  be  blended  into  one 
notion  in  the  minds  of  persons  whose  attention  is  especially 
directed  to  the  market  for  securities. 

In  the  same  way  when  the  rate  of  discount  rises  the  selling 
price  of  securities  tends  to  fall  correspondingly,  under  ordinary 
circumstances.  This  tendency,  however,  is  likely  to  be  much 
intensified  if  the  rise  in  the  rate  of  discount  is  occasioned  by  the 
arrival  of  the  first  stage  of  a commercial  crisis, — that  is,  if  it  is 
due  not  merely  to  the  keenness  of  the  demand  for  loans  but  to  a 
positive  restriction  of  credit  owing  to  a more  or  less  wide-spread 
fear  of  bankruptcies.  For  in  these  circumstances  the  difficulty 
of  borrowing  money  is  likely  to  cause  an  extensive  sale  of  secu- 
rities, as  the  easiest  way  of  obtaining  what  is  required  for  the 
payment  of  debts ; and  consequently  the  selling  price  of  securi- 
ties tends  to  fall,  and  may  even  fall  more  than  in  proportion  to 
the  rise  in  the  rate  of  discount. 

But  again,  in  the  same  circumstances,  traders  who  are  in 
pressing  need  of  money  to  meet  their  liabilities  are  likely  to 
try  to  obtain  it  by  selling  commodities  as  well  as  securities  ; 
consequently  at  such  times  commodities  generally  are  likely 
to  be  cheap,  so  that  “ money  ” will  be  “ dear  ” both  in  the 
economic  and  in  the  ordinary  commercial  sense. 

Finally,  it  should  be  observed  that  those  who  confound  the 
two  meanings  of  “ value  of  money  ” are  not  WTong  in  supposing 
that  the  value  of  the  use  of  money  tends  to  be  lowered  by  an 


CHAP.  V 


VALUE  OF  MONEY 


255 


unusual  influx  of  metallic  money  or  bullion,  and  raised  by  an 
efflux  ; they  are  only  wrong  in  overlooking  the  transitoriness  of 
these  effects.  An  increased  supply  of  gold,  not  accompanied  by 
a corresponding  increase  in  the  work  that  coin  has  to  do  (or  a 
rise  in  the  demand  for  gold  otherwise  caused),  tends  ultimately 
to  loAver  the  purchasing  power  of  money  relatively  to  commodi- 
ties generally ; but,  in  the  first  stage  of  the  process  that  leads 
to  this  result,  the  increment  of  coin — or  in  England  of  notes 
representing  the  new  gold  in  the  Issue  Department  of  the 
Bank — must  pass  through  the  hands  of  bankers,  and  so  increase 
the  amount  of  the  medium  of  exchange  that  they  have  to  lend. 
Hence  the  price  paid  for  the  use  of  money  will  tend  to  fall,  and 
this  fall  will  tend  to  cause  increased  borrowing,  and  consequent 
extended  use  of  the  medium  of  exchange ; and  then  through 
the  resulting  rise  in  prices  generally,  the  greater  part  of  the 
new  coin  or  bank-notes  will  gradually  pass  into  ordinary  cir- 
culation. Thus  the  fall  in  the  purchasing  power  of  money, 
consequent  on  an  influx  of  gold,  will  normally  establish  itself 
through  an  antecedent  and  connected  fall  in  the  value  of  the 
use  of  money. 

In  the  same  way,  when  gold  has  to  leave  a country,  where 
the  banking  system  is  fully  developed,  in  payment  of  commer- 
cial and  other  debts  to  foreigners,  it  will  generally  be  taken 
chiefly  from  the  reserves  of  banks ; and  the  need  of  filling  up 
the  gap  thus  created  will  make  it  expedient  for  bankers  to 
restrict  their  loans,  and  so  tend  to  raise  the  rate  of  discount. 
This  effect  will  generally  be  greater,  the  smaller  the  reserve  of 
metal  kept  by  the  aggregate  of  banks,  compared  with  the 
amount  of  the  medium  of  exchange  that  they  supply:  hence 
it  will  be  especially  marked  in  such  a banking  system  as 
our  own,  in  which  nearly  the  whole  reserve  of  gold  is  kept 
by  the  Bank  of  England. 

§ 6.  Hitherto  I have  assumed  that  there  is  only  one  metal 
used  as  coin,  in  payments  beyond  a certain  low  limit.  Let  us 
now  examine  the  effects  of  using  two  such  metals.  In  the  first 
place,  the  purchasing  power  of  either  will  obviously  be  less  than 
it  would  otherwise  be ; so  far  as  the  use  of  the  two  metals 
actually  takes  place,  and  is  not  merely  permitted  by  law. 
Secondly,  unless  either  the  causes  of  variation  in  the  supply 
of  both  metals  are  the  same,  or  one  metal  is  decidedly  more 


/ 


256 


POLITICAL  ECONOMY 


BOOK  n 


liable  to  such  variation  than  the  other,  the  chances  are 
that  the  variations  in  annual  supply  when  the  two  metals 
are  used  will  be  somewhat  less  in  magnitude  than  when  one 
alone  is  used. 

These  two  effects  are  independent  of  the  question  whether 
(1)  the  two  kinds  of  coins  are  both  legal  tender,  or  (2)  only  one 
is  legally  current,  but  the  other  is  coined  and  commonly  ac- 
cepted at  its  market  value : only  in  the  latter  case  the  standard 
of  value  will  be  entirely  determined  by  the  metal  legally 
current. 

When  both  metals  are  coined  into  legal  tender  in  unlimited 
amounts,  a rate  has  to  be  fixed  at  which  they  circulate  together; 
since  a law  enacting  that  all  debts  of  money  may  be  liquidated 
by  payment  in  either  kind  of  coin,  provided  that  there  is  no 
special  contract  to  the  contrary,  would  be  obviously  incomplete 
without  a precise  determination  of  the  equivalence  of  the  two 
metals. 

So  long  as  this  legal  rate  does  not  vary  materially  from  what 
would  otherwise  be  the  relative  market  value  of  the  two  metals, 
they  will  obviously  tend  to  be  coined  and  used  indifferently; 
except  so  far  as  the  choice  between  them  is  determined  by  the 
convenience  of  carrying  or  handling  them.  But  when  changes 
occur  in  the  conditions  of  supply  or  demand  for  either  metal, 
their  effects  will  be  importantly  different  from  the  effects  that 
would  have  been  produced  apart  from  legal  interference.  To 
trace  these  effects  in  their  proper  order,  it  will  be  convenient  to 
contemplate  a particular  case  of  change ; which,  for  simplicity, 
we  will  first  suppose  to  occur  in  an  isolated  countrj'-,  entirely 
supplied  with  both  metals  fi"om  its  o'rni  mines.  liet  us  assume, 
therefore,  that  gold  and  silver  are  coined  freely  by  Government 
and  made  legally  cuiTent  in  unlimited  amount  at  a fixed  rate 
throughout  this  region ; and  let  us  assume  that  this  rate  in  the 
first  instance  accurately  corresponds  to  the  relative  market- 
values  of  the  two  metals,  as  they  would  exist  apart  fi-om  legal 
interference.  Let  us  then  suppose  that  the  supply  of  silver 
becomes  more  abundant,  the  conditions  determining  the  values 
of  all  other  products  remaining  unaltered.  Then,  apart  from 
legal  interference,  the  gold  price  of  silver  would  fall ; but  under 
the  circumstances  supposed  this  cannot  take  place,  in  the  first 
instance ; for  no  one  will  exchange  his  silver  in  the  market  for 


CHAP.  V 


VALUE  OF  MONEY 


257 


a smaller  amount  of  gold  coin  than  he  could  get  by  taking 
the  silver  to  the  mint  to  be  coined.  Hence  what  will  happen 
will  be  that  all  the  additional  supply  of  silver,  which  the  non- 
monetary demand  will  not  absorb  at  the  legal  rate,  will  go  to  the 
mint ; the  purchasing  power  of  the  whole  mass  of  coin  will  fall 
correspondingly,  gold  and  silver  being  maintained  at  their  legal 
relative  value.  As  the  exchange-value  of  bullion  relatively  to 
other  wares  must  of  course  fall  equally,  an  extension  will  tend 
to  take  place  in  the  non-monetary  demand  for  bullion — gold  as 
well  as  silver.  But  as  no  change  is  supposed  to  occur  in  the 
conditions  of  supply  of  gold  bullion,  there  must  be  a corre- 
sponding diminution  in  the  gold  sent  to  the  mint  for  coinage. 
If  the  increase  in  the  supply  of  silver  were  not  very  great  or 
permanent  its  effects  might  stop  at  this  point,  so  that  no 
difference  would  manifest  itself  between  the  market-rate  and 
the  mint-rate  of  interchange  of  the  two  metals;  the  demand 
having  in  fact,  under  the  pressure  of  governmental  interference, 
adjusted  itself  to  the  change  in  supply.  But  if  the  addition 
to  the  annual  supply  of  silver  be  sufficiently  extensive  and 
prolonged,  the  process  above  described  may  be  carried  on  until 
no  gold  at  all  is  sent  to  the  mint;  and  then,  for  the  first  time  (if 
the  process  still  goes  on),  the  market-price  of  gold  bullion  will 
begin  to  rise.  When  this  rise  has  gone  so  far  that  the  gold  coins 
still  in  use  have  actually — rthrough  the  continued  depreciation  of 
silver,  which  necessarily  drags  down  with  it  the  value  of  the  coined 
gold  as  well — become  less  valuable  than  the  bullion  which  they 
on  the  average  contain,  it  will  become  profitable  to  melt  them 
down ; and  if  the  same  causes  continue  to  operate,  this  process 
will  continue  (unless  prevented  by  law — or  even,  if  the  difference 
between  the  two  rates  be  great,  in  spite  of  legal  interference) 
until  the  coin  used  in  large  payments  is  entirely  composed  of 
the  metal  that  has  fallen  in  value. 

It  thus  appears  that  the  adoption  of  a double  standard  will, 
up  to  a certain  point,  prevent  variations  in  supply  from  affecting 
the  relative  market-value  of  the  two  metals,  as  it  will  tend  to 
produce  changes  in  demand  sufficient  to  absorb  their  effect. 
But  variations  of  a certain  magnitude  cannot  be  thus  counter- 
acted ; on  the  contrary,  such  variations  will  nullify  the  formal 
adoption  of  a double  standard,  and  render  the  currency  practi- 
cally monometallic.  And  it  is  to  be  observed  that  the  change 

s.  P.  E.  17 


258 


POLITICAL  ECONOMY 


BOOK  II 


in  monetary  demand,  by  which  the  bimetallic  system  keeps  the 
relative  value  of  the  two  metals  stable  in  spite  of  a change  in 
supply,  necessarily  tends  to  affect  production  in  the  direction 
opposed  to  its  own  aims : i.e.,  it  prevents  an  enlargement  in  the 
supply  of  (say)  silver  from  being  checked  as  it  otherwise  would 
be  by  a corresponding  fall  in  the  value  of  silver. 

If  now  we  suppose  the  country'  contemplated  to  be  in 
commercial  relations  with  other  countries  in  which  the  double 
standard  is  not  adopted,  the  nullification  of  the  double  standard 
will  be  accelerated ; since  the  single  bimetallic  mint  will  have 
to  sustain  the  rated  value  of  the  two  metals  in  the  larger 
market  constituted  by  all  the  countries  concerned.  Or,  to  put 
it  otherwise,  the  “non-monetary  demand”  for  gold  in  the  country 
with  a double  standard  will  be  partly  a demand  for  exportation 
to  other  countries  where  the  value  of  gold  is  not  legislatively 
tied  to  that  of  silver,  and  silver  will  correspondingly  flow  from 
these  other  countries  to  the  bimetallic  mint. 

§ 7.  It  remains  to  discuss  the  determination  of  the  value 
of  “fiat-money”;  i.e.,  inconvertible  notes  issued  by  government, 
and  purporting  to  be  equivalent  to  a certain  amount  of  coin. 
Assuming  that  the  government  issuing  such  money  can  secure 
for  it — as  it  usually  can — practically  complete  currency  as  an 
internal  medium  of  exchange,  its  value  (as  its  cost  of  production 
is  of  course  insignificant)  depends  entirely  on  the  relation 
of  the  supply  to  the  demand.  If  the  amount  issued  in  any 
country  exceeds  the  amount  of  convertible  notes  of  similar 
nominal  value,  which  the  countiy'  in  question  at  the  particular 
time  would  use,  the  purchasing  power  of  the  whole  medium 
of  exchange  will  tend  to  fall  just  as  it  would  if  there  had  been 
an  equivalent  addition  to  the  amount  of  coin  in  the  country — 
supposing  that  the  government  does  not  simultaneously  -with- 
draw from  circulation  any  part  of  the  coin  in  use’.  The  rise 
in  prices,  which  is  another  aspect  of  this  fall,  vdll  tend  to 
increase  the  imports  and  decrease  the  exports  of  the  country, 

1 If  the  amount  of  such  coin  he  diminished  by  the  action  of  the  government, 
a corresponding  additional  amount  of  room  will  be  made  for  the  inconvertible 
notes.  It  is  to  be  observed,  moreover,  that  the  government  issuing  such  notes 
is  likely  to  be  making  unusual  purchases  by  means  of  them  ; which,  even  if  made 
without  inconvertible  notes,  would  have  occasioned  a temporary  rise  in  prices 
and,  therefore,  a temporarily  greater  room  for  convertible  notes  than  would 
otherwise  be  the  case. 


CHAP.  V 


VALUE  OF  MONEY 


259 


and  thus  to  cause  an  exportation  of  the  standard  coin — which 
for  simplicity’s  sake  we  will  suppose  to  be  gold — to  pay  the 
balance  due.  If  the  excess  in  quantity  of  the  currency  still 
continues,  the  pressing  need  of  gold  to  pay  commercial  debts 
abroad  will  cause  it  to  be  sold  at  a premium.  When  this 
premium  has  once  established  itself,  the  gold  coins  used  in 
ordinary  payments  within  the  country  will  have  a premium 
also:  but,  as  the  above  reasoning  explains,  and  as  experience 
shews,  some  time  may  elapse  before  an  excessive  issue  of  incon- 
vertible notes  produces  this  result.  It  should  be  observed,  too, 
that  strictly  speaking  the  increase  of  the  medium  of  exchange 
through  the  issue  'of  fiat-money  does  not  tend  to  cause  the 
premium  to  be  established,  until  this  increase  has  gone  beyond 
a certain  point ; since,  so  far  as  such  issue  cuts  off  a portion 
of  the  ordinary  demand  for  gold,  it  has  a certain  tendency  to 
lower  its  exchange- value  permanently.  But  this  tendency  will 
be  practically  slight  so  long  as  the  issue  is  confined  to  one 
country. 

In  the  above  reasoning  I have  supposed  the,  region  over 
which  the  fiat-money  is  current  to  be  limited,  and  to  have 
commercial  relations  with  other  countries  outside  it.  But  even 
if  foreign  trade  were  excluded — or  if  we  suppose  an  issue  of 
inconvertible  notes  current  ov^er  the  whole  civilised  world — the 
establishment  of  a premium  on  gold  would  still  take  place,  if 
the  issue  of  inconvertible  notes  were  extended  beyond  a certain 
point ; only  it  would  take  place  more  slowly  and  in  a different 
way.  What  would  happen  in  this  case  would  be,  first,  a general 
rise  in  prices  not  extending  to  gold  bullion,  which  would  pre- 
serve its  previous  price  in  coin,  and  therefore  in  inconvertible 
notes.  This  would  lead  to  an  extension  of  the  non-monetary 
demand  for  bullion ; on  the  other  hand,  as  the  exchange-value 
of  bullion  relatively  to  commodities  generally  would  have  fallen, 
its  supply  would  tend  to  be  reduced ; and  unless  these  two 
changes  together  were  so  slight  that  their  effect  was  balanced  by 
the  simultaneous  reduction  of  the  monetary  demand  for  bullion, 
a rise  in  the  money-price  of  bullion  must  iiltimately  take  place. 
When  this  rise  became  so  great  as  to  make  it  worth  while  to 
melt  down  the  coin,  it  would  be  checked  by  such  melting,  until 
the  standard  coin  had  been  withdrawn  from  circulation;  but, 
after  this,  the  premium  on  bullion  would  correspond  exactly 

17—2 


260 


POLITICAL  ECONOMY 


BOOK  II 


to  the  general  fall  in  prices  resulting  from  the  excessive  issue 
of  notes. 

Note.  It  has  been  already  noticed  that  Mr  Jevons’s  theory  of 
the  relation  between  the  “final  Utility” — or  final  value  in  use — of  a 
commodity  and  its  value  in  exchange  needs  some  modification  in  the 
case  of  money, — at  least  if  we  are  considering  its  social  utility.  For 
since  money  is  only  used  by  being  exchanged,  the  value  in  use  of 
any  portion  of  it  is  simply  its  value  in  exchange  and  can  be  nothing 
else.  Hence,  though  it  is  true  as  we  have  seen  that  the  value  of 
money  tends  to  fall  when  its  supply  is  increased,  just  as  the  value  of 
any  other  commodity  does ; this  is  not  because  the  new  increment  of 
money  furnishes  an  increment  of  utility  or  satisfaction  less  than  that 
still  aflforded  by  the  previously  existing  money  ; but  rather  because, 
speaking  broadly,  the  utility  of  the  whole  aggregate  remains  un- 
affected by  the  addition  to  its  quantity. 


CHAPTER  VI. 

INTEREST. 

§ 1.  In  the  preceding  discussion  on  the  “Value  of  Money” 
in  the  sense  in  which  economists  use  the  term, — i.e.,  the  pur- 
chasing power  of  money  relatively  to  other  wealth, — it  has 
seemed  desirable  to  include  a consideration  of  the  value  of 
money  in  the  ordinary  commercial  sense,  or  the  rate  of  interest 
on  loans  of  money;  and  this,  again,  has  inevitably  led  us  to. 
speak  of  the  rate  of  interest  on  capital  generally.  It  is  con- 
venient, therefore,  in  passing  from  the  theory  of  the  value  of 
products  to  the  theory  of  the  remuneration  of  services, — or  the 
theory  of  distribution  of  wealth,  as  we  at  first  conceived  it, — 
to  commence  by  examining  the  competitive  determination  of 
Interest. 

We  may  conveniently  begin  by  clearing  away  some  con- 
troversy as  to  the  precise  nature  of  the  service  remunerated  by 
interest.  English  economists,  since  Senior,  have  generally 
agreed  to  regard  interest  as  the  “ reward  of  abstinence”:  but  the 
phrase  has  been  criticised  by  socialists  and  semi-socialists,  who 
seem  to  have  understood  it  as  having  an  ethical  import,  and  as 
implying  that  the  sum  paid  to  a capitalist  for  the  use  of  his 
wealth  is  just  compensation  for  the  sacrifice  he  makes  in  not 
immediately  consuming  it.  It  does  not,  however,  appear  that 
either  Senior,  or  his  chief  followers  in  the  use  of  the  phrase, 
intended  any  such  ethical  assertion.  All  that  they  meant  was 
(1)  that  as  any  individual  capitalist  could,  by  the  aid  of  exchange, 
consume  in  some  form  adapted  for  immediate  enjoyment  the 
wealth  which  he  actually  keeps  in  the  form  of  capital,  he  by 
abstaining  from  such  consumption  renders  a service  to  indi- 


262 


POLITICAL  ECONOMY 


BOOK  II 


yiduals,  or  supplies  an  aid  to  industry,  for  which  he  is  paid  by 
interest:  and  (2)  that  this  remuneration  is  necessary,  under  the 
present  social  conditions,  to  induce  the  owners  of  wealth  to 
postpone  their  enjoyment  of  it,  to  the  extent  required  to  keep 
in  existence  the  actual  amount  of  individuals’  capital.  Circum- 
stances are  no  doubt  conceivable  in  which  the  quantity  of 
capital  supplied  would  be  practically  independent  of  the  price 
obtainable  for  the  use  of  it : e.g.,  it  is  conceivable  that  the 
process  of  saving  might  be  carried  on  to  an  adequate  extent  for 
no  other  “ remuneration  ” than  the  satisfaction  derived  from 
having  a provision  for  the  future  needs  of  the  person  who  saves, 
or  of  his  family  or  others  whom  he  may  desire  to  benefit.  But, 
actually,  the  price  paid  for  the  use  of  savings  must  tend  to 
increase  their  total  amount ; though  to  what  extent  it  increases 
it  cannot,  I think,  be  precisely  known. 

However,  we  may  begin  by  simply  regarding  interest  as  the 
share  of  produce  that  falls  to  the  owner  of  capital  as  such ; 
meaning  by  “ capital  ” wealth  employed  so  that  it  may  yield  the 
owner  a surplus  of  new  wealth.  From  the  indi-vudual’s  point  of 
view,  such  capital  may  reasonably  be  considered  as  still  existing, 
even  when  the  wealth  has  been  spent  without  leaving  material 
results,  whenever  it  has  been  employed  so  as  to  secure  the 
owner  a reasonable  expectation  of  having  its  equivalent  returned 
to  him  along  wdth  interest,  or  even  of  receiving  interest  only  in 
perpetuity : but  I shall  not  here  take  account  of  wealth  spent 
in  increasing  the  productive  efficiency  of  human  beings,  since 
the  economic  effects  of  such  expenditure  are  more  conveniently 
considered  under  the  head  of  wages.  It  should  be  observed 
that  in  the  incomes  of  capitalists  who  are  also  employers 
interest  can  only  be  distinguished  by  abstract  analysis  from  that 
other  element  of  an  employer’s  profit,  which  we  have  called  his 
“ wages  of  management  ” ; to  learn  what  part  of  the  earnings  of 
a man  of  business  is  to  be  called  interest,  we  have  to  ascertain 
how  much  he  could  get  for  the  use  of  his  capital,  supposing  he 
withdrew  it  without  loss  from  his  business  and  lent  it  to  other 
persons.  Thus  it  is  from  the  rate  of  interest  actually  paid  on 
borrowed  capital  that  we  infer  the  theoretical  interest — as 
distinct  from  employer’s  profit — of  the  capitalist  who  is  also  an 
employer:  it  is,  therefore,  convenient  to  begin  by  investigat- 
ing the  conditions  that  determine  the  former.  The  “ rate  of 


CHAP.  VI 


INTEREST 


263 


“interest”  may  be  defined  as  the  proportion  of  the  price  paid  to 
the  value  of  the  capital  borrowed  for  a certain  fixed  time, 
which  we  will  take  (according  to  usage)  to  be  a year. 

This  definition,  however,  requires  further  explanation  or 
qualification  in  two  points.  In  the  first  place,  we  have  already 
seen  the  need  of  distinguishing  the  rate  of  discount  or  interest 
in  the  money-market  from  the  rate  of  interest  on  capital 
generally ; since  the  two  rates,  though  connected,  are  not 
identical,  nor  altogether  determined  by  the  same  laws.  Of 
course,  when  a loan  is  made,  what  is  actually  borrowed  is, 
in  most  cases,  the  medium  of  exchange ; but  it  is  only  when 
it  is  borrowed  from  persons  who  do  not  make  a business  of 
dealing  in  money,  that  the  price  paid  for  the  loan  may  be 
regarded  as  substantially  paid  for  use  of  the  capital  purchased 
with  the  money  borrowed.  The  interest  paid  to  professional 
lenders  of  money  must,  as  was  before  observed,  include  remune- 
ration for  the  labour  of  such  persons ; and  this  remuneration  is 
obviously  not  interest  in  the  sense  in  which  we  are  concerned 
with  it  in  the  theory  of  distribution : while,  on  the  other  hand, 
so  far  as  such  lenders  are  also  producers  of  the  greater  part  of 
the  medium  of  exchange  at  a cost  considerably  less  than  that 
of  the  coin  that  forms  the  remaining  part, — as  we  have  seen  to 
be  the  case  with  bankers, — competition  may  force  them  to 
make  loans  for  short  periods  at  a rate  even  lower  than  that  at 
which  money  or  capital  is  borrowed  from  the  public  generally. 
It  must,  therefore,  be  borne  in  mind  that  our  present  investi- 
gation relates  primarily  to  this  latter  rate : and  only  secondarily 
and  with  the  qualifications  already  noticed  to  the  former. 

Secondly,  we  have  to  take  into  account  that  there  is  a large 
amount  of  capital  not  formally  lent,  of  which,  nevertheless,  the 
yield  is  to  be  regarded  as  interest  and  not  profit ; since  the 
capital  is  owned  by  persons  who  spend  no  labour — or  at  least 
no  remunerated  labour — in  managing  it.  This  is  the  case 
{e.g.)  with  the  capital  of  railway  companies,  water  companies, 
gas  companies,  and  many  other  large  masses  of  capital  owned 
in  joint-stock : no  one  who  becomes  a shareholder  in  such 
companies  considers  any  trouble  he  may  take  in  electing  di- 
rectors and  criticising  their  reports  as  labour  requiring  re- 
muneration ; hence  the  dividends  of  such  companies  are  to 
be  regarded  as  merely  interest  on  the  capital  owned  by  the 


264 


POLITICAL  ECONOMY 


BOOK  n 


shareholders,  no  less  than  the  money  annually  paid  to  the 
bondholders  L 

Again,  it  has  been  before  observed  that  what  we  commonly 
speak  of  as  the  “capital”  of  such  companies  frequently  includes 
portions  of  land : and  that  the  distinction  which,  in  considering 
social  production,  we  drew  between  capital — as  the  result  of 
labour— and  land  in  its  original  condition,  has  primd  fade  no 
application  when  we  are  considering  the  question  of  distri- 
bution., The  material  capital  oAvned  by  an  individual  is  rarely 
to  any  great  extent  the  actual  results  of  his  own  labour;  and 
its  value  as  a source  of  future  wealth  cannot  depend  on  whether 
or  not  it  was  the  result  of  the  labour  of  some  one  else.  I 
propose,  therefore,  for  the  present,  to  regard  the  jdeld  of  land 
as  a species  of  interest ; reserving  for  the  next  chapter  the  task 
of  examining  any  important  characteristics  peculiar  to  the 
determination  of  the  yield-  of  land. 

In  considering  the  rate  of  interest  on  land  we  have  to  deal 
with  a point  of  some  subtlety  as  to  the  right  mode  of  measur- 
ing the  amount  of  an  individual’s  capital.  We  ordinarily 
measure  capital,  as  we  measure  wealth  generally,  by  its  exchange- 
value  ; so  that  if  any  particular  investment  rises  in  value  during 
the  period  investigated — as  land,  on  the  whole,  has  continually 
done — we  ought  (assuming  that  there  is  no  cognisable  change 
in  the  purchasing  power  of  money)  to  consider  the  additional 
increment  of  value  as  a part  of  the  annual  peld  of  the  invest- 
ment, no  less  than  the  rent  or  interest  nominally  received. 
Similarly,  in  the  case  of  investments  of  which  the  price  has 
fallen,  we  ought  to  subtract  the  difference  from  the  interest  or 
dividends  which  have  been  paid  to  the  investors.  But  when  we 
examine  the  conditions  of  such  changes  in  the  selling  value  of 

1 It  may  be  said  that  though  ordinary  shareholders  in  joint-stock  companies 
obtain  no  remuneration  for  the  labour  of  managing  the  business  of  the  com- 
panies, they  do  obtain  the  remuneration  of  higher  dividends  for  the  labour  spent 
in  careful  selection  of  investments.  And  this  is  no  doubt  true,  so  far  as  such 
labour  results,  on  the  average,  in  a more  accurate  estimate  of  the  risks  of 
different  investments.  But  since  the  remark  applies  as  much  to  different  in- 
vestments of  money  formally  lent  as  it  does  to  money  employed  in  piuchasing 
shares,  it  seems  more  convenient  to  draw  attention  to  this  remuneration  of 
labour  at  a later  point  of  the  discussion.  See  p.  ‘269. 

^ As  will  presently  appear,  in  dealing  with  the  (approximately)  uniform 
rate  of  interest  with  which  we  are  concerned  in  the  present  chapter,  the  chief 
controversies  as  to  the  determination  of  rent  do  not  come  before  us. 


CHAP.  VI 


INTEREST 


265 


investments,  we  find  that  one  important  cause  is  a change  in  the 
rate  of  interest  itself.  If  the  rent  of  a piece  of  land  were  to 
remain  the  same  while  the  current  rate  of  interest  fell  from 
3 to  2 per  cent.,  the  price  of  the  land  would  ceteris  paribus  rise 
50  per  cent.  From  the  point  of  view  of  the  community,  taken 
in  the  preceding  book,  this  rise  obviously  does  not  constitute  a 
real  increase  of  wealth : since  the  command  over  the  necessaries 
and  conveniences  of  life  possessed  by  the  community  is,  speaking 
broadly,  no  greater  because  the  exchange-value  of  its  instruments 
of  production  has  risen  in  consequence  of  a fall  in  the  rate  of 
interest.  But  from  the  individual’s  point  of  view  the  increase 
of  wealth  is,  in  a certain  sense,  real  and  not  merely  nominal ; 
for  though  the  real  income  of  the  owner  of  the  capital  is  not 
increased  by  the  change,  his  power  of  purchasing  consumable 
commodities  has  certainly  increased,  though  he  can  only  exercise 
it  by  spending  his  capital.  I think,  therefore,  that  this  kind  of 
increase  of  nominal  wealth  should  be  carefully  noted  and 
distinguished  from  other  kinds ; but  here  we  may  conveniently 
avoid  any  complications  arising  out  of  it  by  considering  our 
problem  statically,  not  dynamically ; that  is,  by  assuming 
that  the  rate  of  interest  remains  the  same  during  the  period 
investigated,  and  analysing  the  forces  that  determine  it  to  this 
stable  condition.  Similarly,  for  simplicity,  we  may  assume 
that  there  is  no  appreciable  change  in  the  purchasing  power 
of  money. 

§ 2.  Here,  however,  another  question  is  forcibly  suggested, — 
namely,  how  far,  and  on  what  grounds,  we  have  a right  to  speak 
of  “a  rate  of  interest”  as  current  at  any  given  time.  It  is 
notorious  that  capital  is  borrowed  contemporaneously  at  very 
different  rates  by  different  individuals  and  companies ; and  such 
differences  are  still  more  striking  when  we  include  under  the 
notion  of  interest — as  we  have  seen  reason  to  do — the  dividends 
paid  on  the  joint-stocks  of  companies.  For  such  dividends 
actually  vary  from  20  per  cent,  or  more  down  to  zero:  and 
when  we  include  changes  in  the  selling  value  of  the  investments 
during  the  year,  the  variations  are  increased  manyfold,  since  the 
lower  limit  becomes  a considerable  negative  quantity.  In  what 
sense,  then,  can  we  speak  of  a tendency  to  a uniform  rate  of 
interest  at  a given  time  and  place  ? 

Firstly,  in  so  speaking  we  do  not  mean  by  “ rate  of  interest” 


266 


POLITICAL  ECONOMY 


BOOK  II 


on  any  investment  the  proportion  of  the  annual  yield  to  the  capital 
originally  invested,  but  the  proportion  between  the  dividends  or 
interest  act  illy  paid  and  the  present  selling  price  of  the  stock 
or  bonds  upon  which  payment  is  made.  We  can  affirm  no 
general  tendency  to  uniformity  in  the  former  ratio.  No  doubt 
if  we  supposed  all  capital  to  have  been  originally  invested  with 
equal  knowledge  and  foresight,  we  might  infer  that  the  yield  of 
equal  portions  of  capital  would  in  the  long  run  be  equal,  if  they 
were  invested  contemporaneously  or  at  times  at  which  the 
current  rate  of  interest  was  the  same.  But  in  order  to  draw 
even  from  this  hypothesis  any  inference  with  regard  to  the 
proportion  of  present  annual  yield  to  capital  originally  invested, 
we  should  have  to  know  in  every  case  the  amount  received  in 
previous  years ; since  some  forms  of  capital  are  more  liable  than 
others  to  depreciation  through  various  causes,  so  that  their  peld 
in  the  earlier  years  after  investment  has  to  be  proportionally 
greater ; while  other  investments  again  take  some  time  to  rise 
to  their  full  height  of  profitableness. 

Secondly,  in  saying  that  the  rate  of  interest  even  on  new 
investments,  or  old  investments  estimated  at  their  present 
value,  tends  to  be  the  same,  it  is  only  meant  that  all  differences 
in  the  rate  of  interest  so  estimated,  on  securities  currently  sold 
in  open  market,  correspond  to  differences  in  the  general  esti- 
mate of  the  probabilities  of  fall  or  rise  in  the  future  yield  or  in 
the  selling  value  of  such  investments  h So  explained,  the  pro- 
position follows  primd  facie  from  the  principle  that  in  all 
pecuniary  transactions  each  person  concerned  seeks  the  gi-eatest 
pecuniary  gain  to  himself ; and  there  is  scarcely  any  broad  and 
simple  deduction  from  this  principle  which  approximates  so 
closely  to  the  actual  facts  of  existing  societies.  It  is  generally 
true  that  men  in  buffing  debts  and  shares  are  solely  influenced 
by  the  desire  to  get  the  greatest  amount  of  interest  that  they 
can  on  the  whole ; so  that  if  any  one  prefers  an  investment 
that  at  present  yields  a lower  interest  than  another,  it  is  because 
he  either  considers  it  safer  or  expects  it  to  rise  hereafter. 

The  chief  exceptional  cases  may  be  classed  under  the  fol- 
lowing heads.  (1)  Some  kinds  of  securities  are  purchased  at 
a higher  price  than  would  otherwise  be  the  case,  on  account  of 

^ Mill’s  phrase  “indemnity  for  risk”  is  not  sufficiently  general  to  cover  all 


cases. 


CHAP.  VI 


INTEREST 


267 


some  indirect  pecuniary  advantage  obtained  by  the  possession  of 
them.  For  instance,  securities  widely  known  and  esteemed  safe, 
for  which  the  demand  is  extensive  and  steady,  and  the  value 
in  consequence  comparatively  stable,  have  a special  utility  for 
bankers  and  merchants,  as  a means  of  obtaining  money  in  an 
emergency ; again,  such  securities  (as  we  have  noticed)  are,  to  a 
certain  extent,  used  for  the  payment  of  commercial  debts  in 
foreign  countries,  and  have  thus  a special  utility  as  an  inter- 
national medium  of  exchange.  Either  of  these  causes  will  have 
a certain  tendency  to  raise  the  average  price  of  the  securities 
affected  by  it.  (2)  To  some  extent,  again,  the  price  of  certain 
investments  is  raised  through  the  operation  of  motives  which, 
though  self-regarding,  act  counter  to  the  desire  of  pecuniary  gain. 
Thus  the  price  of  land  in  England  has  undoubtedly  been  kept  up 
by  the  social  consideration  and  power  that  its  possession  has 
conferred  : and  again,  it  is  probable  that  investments  reputed 
especially  safe  are  purchased  at  a rate  of  interest  lower,  as  com- 
pared with  that  of  somewhat  less  trusted  securities,  by  a differ- 
ence somewhat  greater  than  that  which  would  exactly  represent 
compensation  for  the  extra  risk  of  the  latter;  because  most  persons 
who  live  chiefly  on  interest  would  suffer  from  a decrease  of  income 
more  than  they  would  be  benefited  by  an  increase ; and  again, 
the  freedom  from  anxiety  that  safe  investments  give  is  itself  a 
utility  which  has  a certain  price.  It  is  to  be  observed,  on  the 
other  handy  that  the  excitement  of  fluctuations  of  gain  and  loss 
is  a source  of  keen  pleasure  to  many  minds ; as  is  shewn  by  the 
extensive  existence  of  lotteries,  gaming,  betting,  and  speculation 
in  stocks  by  private  persons.  It  seems  to  be  the  fact  that,  on  this 
ground,  indemnity  for  risk  is  not  even  sufficiently  represented 
in  the  price  of  some  very  fluctuating  investments  \ (3)  Again, 

the  effect  that  would  follow  from  a spontaneous  willingness  to 

^ If  we  had  only  to  consider  investments  made  in  view  of  the  investor’s 
personal  interests,  it  would  perhaps  be  a delicate  matter  to  balance  the  influence 
of  the  pleasures  of  excitement  against  that  of  the  pains  of  anxiety.  But  in  the 
investment  of  savings  for  posterity  the  former  motive  does  not  come  in ; here, 
therefore,  it  seems  likely  that,  on  the  whole,  security  will  be  rated  somewhat  above 
its  exact  pecuniary  value.  And  the  same  would,  I think,  be  true  of  investments 
made  by  trustees,  even  apart  from  the  legal  interference  that  actually  restricts 
them  to  certain  funds  and  stocks ; since  trustees  are  much  more  likely  to  be 
blamed  for  diminishing  the  funds  entrusted  to  them  by  hazardous  purchases 
than  praised  for  increasing  them  by  lucky  hits. 


268 


POLITICAL  ECONOMY 


BOOK  II 


pay  an  extra  price  for  specially  safe  investments  will  equally 
tend  to  be  produced,  if  a certain  portion  of  the  capital  of  the 
community  is  kept  in  such  investments  by  legal  compulsion ; as 
is  the  case  in  England  with  a large  part  of  the  funds  held  by 
trustees.  (4)  Finally,  in  some  cases,  a diminished  rate  of 
interest  is  accepted  out  of  regard  for  the  public  well-being  or 
sympathy  with  private  individuals.  Thus  considerable  sums 
are  from  time  to  time  invested  in  undertakings  of  a semi- 
commercial, semi-philanthropic  character,  which  are  not  found 
by  experience,  and  are  not  expected,  to  bring  in  even  ultimately 
interest  at  the  average  rate ; and  money  is  often  borrowed 
from  relatives  or  friends  by  struggling  men  of  business,  at  a rate 
which  very'  inadequately  represents  the  risk  of  loss. 

But  even  if  we  take  these  causes  of  variation  fully  into 
account,  it  still  remains  true  that  the  differences  in  the  rates  of 
interest  obtainable  at  any  given  time  on  different  fresh  invest- 
ments of  capital  are  mainly  due  to  differences  in  the  generally 
estimated  prospects  of  change  in  the  interest  or  selling  value  of 
the  respective  securities.  This  varying  prospect  is  in  the 
majority  of  cases  a prospect  of  possible  loss:  the  interest  accord- 
ingly is  above  what  would  be  paid  for  a loan  of  which  the  repay- 
ment was  considered  absolutely  secure.  In  this  way,  for  example, 
the  interest  on  the  ordinary  stock  of  a prosperous  railway  com- 
pany, taken  at  its  selling  value,  comes  to  be  generally  somewhat 
higher  at  ordinary  times  than  the  interest  on  its  “ Preference  ” 
stock  or  shares ; this  latter  again  being  somewhat  higher  than 
the  interest  paid  on  the  debentures  of  such  a company*;  while 
the  interest  on  the  debt  of  the  English  Government  would 
undoubtedly  be  less  than  this  last,  even  apart  from  the  other 
influences  which,  as  we  have  seen,  tend  to  raise  the  price  of 
“ consols.”  In  such  cases,  evidently,  the  surplus  receipts  repre- 
sent the  general  estimate  of  adequate  insurance  against  the 
different  risks  of  loss. 

So  far  as  such  expectations  of  probable  loss’  (and  in  some 

* Joint-stock  companies  frequently  lay  by  a certain  part  of  their  proceeds  to 
form  an  insurancejfund  against  risks.  In  this  way  they  diminish  the  hazard 
of  their  investments,  and  proportionately  raise  the  ratio  which  the  seUtug  value 
of  their  shares  bears  to  the  annual  yield ; but  they  do  not  profess  to  make 
such  investments  “ as  safe  as  the  Funds”:  there  still  remain  indefinite  risks 
of  extraordinaiy  losses  through  depreciation  or  destruction  of  capital,  which 
investors  undoubtedly  take  into  account. 


CHAP.  VI 


INTEREST 


269 


cases,  of  increased  yield)  are  on  the  average  well  founded,  it  is 
evident  that,  on  the  whole,  after  a sufficient  lapse  of  time,  the 
differences  in  the  original  yield  of  different  investments  will 
have  been  compensated  by  the  realisation  of  the  expected  gains 
and  losses ; so  that  the  aggregate  interest  on  the  whole  capital 
will  prove  to  be  about  as  much  as  would  have  been  obtained 
if  it  had  all  been  lent  on  perfectly  good  security — allowance 
being  made  for  any  extra  price  currently  paid  for  special 
advantages  of  safety  (as  before  noticed).  Persons  of  superior 
knowledge  and  foresight  will  of  course  tend  to  get  considerably 
more  from  their  investments,  by  estimating  more  accurately 
than  others  the  risk  of  undertakings  which,  from  their  novelty 
or  some  other  cause,  are  rightly  regarded  as  hazardous  by 
prudent  persons  without  special  knowledge.  Such  investors, 
in  fact,  obtain  a certain  return  for  the  skilled  labour  that  they 
perform  in  estimating  the  prospects  of  novel  or  otherwise 
hazardous  undertakings;  and  if  we  could  assume  that  this 
labour  is,  on  the  whole,  undertaken  by  fairly  competent  persons, 
we  should  infer  that  the  yield  of  such  undertakings  would  on 
the  average  exceed  that  of  safer  investments  by  an  amount 
sufficient  to  provide  adequate  remuneration  for  such  labour. 
But  this  assumption  would,  I thii  cC,  be  unwarrantable  as  regards 
any  actual  society ; since  ignorant,  rash,  and  credulous  persons 
investing  in  novel  undertakings  are  commonly  believed  to  get, 
on  the  average,  considerably  less  interest  than  if  they  had  lent 
their  capital  on  the  most  widely  esteemed  security — in  fact  will 
not  unfrequently  be  found  to  have  lost  capital  as  well  as  interest. 
At  any  rate  we  may  say  that  the  rate  of  interest  on  newly 
borrowed  capital,  which  was  generally  believed  to  be  as  secure 
as  possible,  would  at  any  given  time  be  nearly  uniform,  and — 
after  allowing  for  the  extra  price  of  special  safety — would 
represent  approximately  the  common  expectation  of  the  average 
yield  of  all  capital  that  was  at  that  time  being  invested ; 
supposing  that  there  was  no  general  expectation  of  a permanent 
rise  or  fall  hereafter  in  the  rate  of  interest,  or  in  the  purchasing 
power  of  money*.  It  is  then  with  the  rate  of  interest  so  under- 

* If  either  the  rate  of  interest  or  the  purchasing  power  of  money  were  gene- 
rally expected  to  rise  or  fall  in  the  future,  the  relations  of  the  rate  of  interest  on 
loans  of  money  with  perfect  security  to  the  expected  average  yield  of  capital 


270 


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stood,  the  expected  average  3deld  on  freshly  invested  capital, 
that  we  are  now  primarily  concerned.  Of  course  in  the  case  of 
any  particular  individual  who  is  not  an  employer  of  capital,  a 
fresh  investment  will  generally  be  effected  by  purchasing  some 
debt  already  contracted,  or  a share  of  some  capital  already  in 
existence.  But  such  investments  are  mere  transfers  which 
disappear  when  we  are  considering  the  aggregate  of  individuals’ 
capital ; from  this  point  of  view  a fresh  investment  on  which 
interest  is  paid  must  imply  either  the  contraction  of  a new 
debt,  or  the  formation  by  a joint-stock  company  of  new  real 
capital  in  addition  to  the  old,  the  value  of  this  latter  being 
assumed  to  be  kept  up. 

§ 3.  Let  us  now  proceed  to  analyse  the  causes  w'hich 
determine  the  rate  of  interest  as  above  defined.  It  wdll  be 
simpler  to  confine  our  consideration  in  the  first  instance  to 
borrowed  capital ; and  afterwards  extend  our  \dew  to  include 
the  case  of  new  capital  employed  by  its  owner.  Applying,  mutatis 
mutandis,  the  principles  laid  down  in  investigating  the  general 
theory  of  the  value  of  products,  we  may  assume  that  the  use  of 
capital  is  a commodity  of  which  the  amount  demanded  will 
vary  inversely  with  the  exchange-value,  so  long  as  the  causes  of 
the  demand  remain  unchanged.  So  far,  then,  as  we  may 
assume  the  amount  of  capital  seeking  employment  at  interest 
to  be  determined  independently  of  the  rate  of  interest,  the  price 
obtained  by  the  o\vner  for  the  use  of  his  capital  must  vary  wnth 
the  intensity  of  the  demand  for  it.  So  far,  however,  as  the 
supply  of  such  capital  varies  with  the  price  obtainable  for  the 
use  of  it,  the  determination  of  the  rate  of  interest  will  depend 
on  conditions  of  demand  and  supply  combined,  just  as  the 
normal  price  of  a material  product  does.  Under  these  circum- 
stances, we  may  conveniently  begin  by  examining  first  the 
conditions  of  demand  for  capital. 

There  are  two  broadly  different  kinds  of  demand  for  loans ; 


would  become  more  complicated ; since  the  price  paid  for  the  use  of  money 
would  vary  with  the  length  of  time  for  which  it  is  borrowed ; and  the  price  of 
investments  expected  to  yield  a high  profit  at  onoe  for  a short  time  would  vary 
correspondingly  as  compared  with  the  price  of  those  of  which  the  yield  was 
likely  to  remain  more  uniform  or  to  rise  hereafter.  But  since  it  would  seem  that 
no  such  general  expectation  has  ever  yet  influenced  ordinary  investors,  it  is 
hardly  worth  while  to  develop  these  more  complicated  relations  in  detail. 


CHAP.  VI 


INTEREST 


271 


which  we  may  distinguish  as  Industrial  and  Non-industrial  h 
In  the  former  case  capital  is  borrowed  to  replace  itself  with  a 
profit  to  the  user,  and  will  therefore  continue  to  exist  in  the 
form — chiefly — of  improvements  of  land,  buildings,  machinery, 
raw  or  auxiliary  materials,  and  unsold  products,  finished  or 
half-finished.  But  the  money  of  A may  also  be  borrowed  by  B 
merely  in  order  to  increase  the  latter’s  expenditure ; in  which 
case  the  commodities  purchased  by  it  will  be  consumed  without 
replacement ; and  the  interest  that  B subsequently  pays  to  A 
will  be  taken  out  of  his  share  of  produce  otherwise  obtained*. 


* A case  intermediate  between  the  two  is  the  case  of  capital  borrowed  to 
prevent  the  ruin  through  temporary  pressure  of  some  individual’s  generally 
profitable  industry,  and  the  consequent  destruction  of  some  or  all  of  his  capital 
invested  in  the  industry.  This  case  resembles  industrial  borrowing  in  being 
favourable  to  the  production  of  the  community  taken  as  a whole;  but  it  is 
rather  to  be  classed  with  non-industrial  borrowing,  when  we  are  considering  the 
general  economic  laws  determining  the  rate  of  interest  that  such  borrowers  will 
have  to  pay. 

^ It  is  of  course  possible  that  the  interest  of  the  debt  thus  contracted  may 
be  from  the  first  paid  out  of  the  yield  of  some  kind  of  capital,  which  for  some 
reason  or  other  the  debtor  does  not  wish  to  sell.  In  this  case  the  payment  will 
for  some  purposes  be  properly  regarded  not  as  an  addition  to  interest,  but  as  a 
mere  transfer  of  interest  from  the  borrower  to  the  lender.  But  the  difference  is 
not  important  for  our  present  inquiry : since  the  loan  when  made  will  be  a new 
investment  of  the  lender’s  capital,  while  its  interest  will  be  paid  from  the  yield 
of  an  old  investment  of  the  borrower’s,  so  that  the  former  will  operate  in  deter- 
mining the  current  rate  of  interest  just  as  much  as  if  the  borrower  owned  no 
capital. 

The  dispute  whether  the  debts  contracted  by  individuals,  or  by  the  govern- 
ment of  a community  so  far  as  it  borrows  from  its  subjects, — in  excess  of  any 
capital  that  the  borrower  may  own — constitute  an  addition  to  the  whole  aggregate 
of  (individuals’)  capital  in  the  community  that  includes  both  borrowers  and 
lenders,  turns  on  a merely  formal — if  not  exactly  a verbal — point.  If  we  allow 
the  conception  of  negative  quantity  to  be  apphed  to  capital,  we  may  legitimately 
say  that  a borrower  without  (positive)  capital  who  is  under  the  obligation  of 
paying  interest  on  a debt  owns  an  amount  of  negative  capital  equal  to  the  value 
of  the  debt  to  the  lender ; and,  therefore,  that  the  aggregate  capital  of  the  two  is 
not  augmented  by  the  transaction.  If,  however,  this  conception  is  rejected  as 
too  unfamiliar,  we  must  certainly  admit  that  the  capital  of  the  community — 
in  the  sense  of  “aggregate  capital  of  individual  members  of  the  community’’ — is 
increased  by  the  kind  of  loans  that  we  are  considering ; only  we  must  add  that 
such  increase  involves  a corresponding  prospect  of  diminished  income  to  some 
other  members  of  the  same  community. 

It  should  be  observed,  however,  that  among  the  debts  which  form  part  of  the 
capital  of  individuals,  that  part  of  the  medium  of  exchange,  which  consists  of  the 
obligations  of  bankers  to  pay  coin  on  demand,  occupies  a peculiar  position. 
So  far  as  this  money  is  used  not  in  mediating  the  transfer  of  commodities  to  the 


272 


POLITICAL  ECONOMY 


BOOK  II 


Loans  of  this  latter  kind  do  not  increase  social  capital ; but 
they  absorb  the  savings  of  the  lenders  no  less  than  loans  for 
productive  purposes,  and  therefore  the  demand  for  them 
operates  in  determining  the  rate  of  interest  at  any  particular 
time,  just  as  much  as  the  industrial  demand.  And  it  is  con- 
ceivable that  borrowed  wealth  might  be  chiefly  used  unpro- 
ductively, — to  meet  temporary  deficits  of  income  or  occasions  of 
exceptional  expenditure,  or  by  persons  living  habitually  beyond 
their  means, — the  wealth  used  in  production  being  almost 
exclusively  employed  by  its  owners.  In  such  circumstances 
there  would  be  no  advantage  in  investigating  the  conditions 
of  the  demand  and  supply  of  capital  separately : as  the  rate 
of  interest  would  simply  express  the  resultant  estimate  formed 
in  the  community  of  the  comparative  advantages  of  present  and 
future  enjoyment  of  wealth.  But  in  a thrifty  and  progressive 
community,  in  an  advanced  stage  of  industrial  development, 
the  borrowing  of  producers  with  a view  to  profit — including 
under  this  term  the  formation  of  joint-stock  companies  in  which 
the  public  invest — is  much  more  extensive  than  the  borrowing 
for  expenditure : and  since  the  amount  of  the  latter  borrovdng 
is  actually  to  a large  extent  fixed  independently  of  the  rate  of 
interest*,  we  may  without  material  error  consider  this  kind  of 
demand  to  affect  the  rate  of  interest  merely  by  absorbing  a 
portion  of  the  savings  continually  accumulated,  and  so  diminish- 
ing the  supply  of  capital  available  for  industrial  uses. 

Under  the  general  notion  of  “ non-industrial  borrowing”  we 

consumer,  but  in  the  business  of  production — so  far,  that  is,  as  the  current 
account  of  a man  of  business  is  kept  for  the  purposes  of  his  business — it  would 
ordinarily  be  included  in  an  estimate  of  his  wealth  employed  in  production,  no 
less  than  the  coin  that  he  requires  for  similar  purposes ; at  the  same  time,  so  far  as 
no  interest  is  paid  by  the  banker  on  these  current  accounts,  he  receives  without 
deduction  the  interest  of  the  investments  which  this  acceptance  of  his  obligations 
as  money  has  enabled  him  to  make.  Thus  the  nominal  amount  of  capital  on 
which  interest  is  paid  or  earned  is  undoubtedly  increased  by  the  creation  of  this 
medium  of  exchange : and  this  increase  is  not  balanced — as  it  is  in  the  case 
(just  discussed)  of  ordinary  debts — by  a correspondingly  diminished  prospect  of 
income  to  the  banker.  But,  as  has  already  been  said,  the  interest  received  by 
the  banker  is,  from  our  present  point  of  view,  to  be  regarded  as  really  the  price 
paid  by  society  for  the  labour  of  himself  and  his  servants;  except  so  far  as  it  is 
interest  on  his  own  capital. 

* The  borrowuig  of  governments  for  wars  and  other  emergencies  is  generally 
thus  fixed : and  much  of  the  borrowing  of  individuals  for  unproductive  expendi- 
ture would  be  unaffected  by  any  moderate  changes  in  the  rate  of  interest. 


CHAP.  VI 


INTEREST 


273 


must  include  the  hiring  or  renting  of  the  durable  wealth  which 
we  have  previously  distinguished  as  consumers’  capital ; of 
which  private  dwelling-houses  may  be  taken  as  a principal 
example.  The  proportion  of  the  price  paid  for  the  use  of  such 
things  to  their  selling  value  will  tend  to  vary  with  variations 
in  the  rate  of  interest — including,  of  course,  besides  interest 
proper,  adequate  compensation  for  gradual  deterioration ; and 
the  increased  need  of  such  articles  which  accompanies  the  growth 
of  wealth  and  population  in  a community  will  absorb  a certain 
portion  of  savings  which  would  otherwise  have  been  invested  in 
industry.  The  amount  thus  absorbed  will  tend  ceteris  paribus 
to  be  somewhat  greater  when  interest  is  low  than  when  it  is 
high ; thus  {e.g.)  a low  rate  of  interest  will  give  a certain 
inducement  to  build  more  houses  and  to  build  them  more 
durably.  This  will  be  true,  to  some  extent,  of  the  consumers’ 
capital  that  is  owned  by  the  user,  no  less  than  of  that  which  is 
hired : in  either  case  such  wealth  is  a form  of  investment  of 
savings  which,  so  far  as  it  is  managed  economically,  must  be 
affected  by  changes  in  the  yield  of  investments  generally.  But 
the  economic  comparison  of  present  to  future  utilities,  made  by 
purchasers  of  such  durable  wealth  for  personal  use,  has  not 
commonly  the  exactness  of  commercial  calculations : and  on 
the  whole  the  changes  in  extent  of  demand  for  increased  con- 
sumers’ capital  that  would  result  from  changes  in  the  rate  of 
interest  are  probably  not  great  in  proportion  to  the  whole 
demand ; so  that  the  rate  of  interest  on  capital  held  in  this 
form,  in  a modern  industrial  society,  may  be  regarded  as  mainly 
determined  by  the  relations  of  supply  and  demand  of  capital 
industrially  invested,  no  less  than  the  rate  on  loans  of  money 
for  unproductive  expenditure. 

§ 4.  I pass,  therefore,  to  examine  the  nature  and  opera- 
tion of  the  industrial  demand  for  capital  in  any  community. 
This  demand,  so  far  as  it  leads  to  the  actual  payment  of 
interest,  is  the  demand  of  persons  wishing  to  employ  the 
capital  of  others.  But  its  ulterior  cause  lies  in  the  existence, 
and  recognition  by  such  persons,  of  unoccupied  opportunities 
for  profitably  employing  capital  in  industry;  and  a portion  of 
the  aggregate  of  such  opportunities  is  continually  turned  to 
account  by  the  savings  of  capitalists  who  are  themselves  in 
business,  and  employ  their  own  new  capital.  It  will,  therefore, 
s.  P.  E.  18 


274 


POLITICAL  ECONOMY 


BOOK  II 


be  proper  to  include  this  portion  in  a general  view  of  the  whole 
industrial  demand ; and  for  similar  reasons  we  must  now  include 
the  savings  employed  by  their  owners,  in  our  view  of  the  whole 
supply  offered  at  any  time  to  meet  the  industrial  demand.  It 
should  be  observed,  however,  that  the  actual  employment  of 
capital  in  industry  is  likely  to  be  somewhat  different,  according 
as  the  employer  is  or  is  not  also  the  owner.  Employers  may 
sometimes  invest  their  own  savings  when  they  would  not 
borrow;  either  because  they  are  reluctant  to  incur  the  relatively 
more  serious  loss  of  income  that  would  result  from  borrowing  if 
the  investment  failed ; or  because,  if  they  can  only  borrow  on 
personal  security,  they  may  be  unable  to  obtain  a loan  except 
at  a rate  too  high  to  leave  them  an  adequate  remuneration 
for  the  trouble  of  managing  the  borrowed  capital.  On  the 
other  hand,  the  field  of  apparently  profitable  emplojTuent  tends 
in  one  way  to  become  gi’eater  the  more  the  capital  is  borrowed ; 
since  enterprising  employers  and  promoters  of  companies  will — 
without  any  bad  faith — be  often  more  inclined  to  run  risks 
with  other  people’s  money  than  they  would  be  with  their  own. 
And  perhaps,  in  a broad  view  of  the  determination  of  interest, 
we  may  neglect  these  opposite  tendencies,  and  consider  the 
field  of  employment  of  savings  as  independent  of  the  o’vraership 
of  the  savings. 

We  must  now  determine  somewhat  more  precisely  the 
relation  between  the  supply  of  capital  and  the  field  of  employ- 
ment. In  the  first  place,  we  cannot  properly  consider  the 
whole  addition  to  the  stock  of  capital  made  Avithin  any  given 
time  to  operate  as  a new  investment,  in  determining  the 
current  rate  of  interest;  but  only  that  part  of  it  with  regard 
to  Avhich  the  investor’s  choice  is  perfectly  free  and  un- 
fettered. That  is,  Ave  must  exclude  all  the  capital  that  is 
from  time  to  time  required  for  the  completion  of  industrial 
undertakings  already  begun,  so  far  as  such  completion  is 
necessary  to  prevent  the  loss  or  diminution  of  the  yield  expected 
on  Avhat  has  already  been  invested.  On  the  other  hand,  AA'e 
must,  for  a similar  reason,  include  that  portion  of  the  capital 
already  invested  in  any  business,  Avhich  its  employer  could 
withdraAv  AAuthout  affecting  the  productiA-eness  of  the  remainder : 
since  such  capital  is  manifestly  just  as  available  for  fi-esh 
investment  as  capital  neAvly  produced.  We  may  perhaps  desig- 


CHAP.  VI 


INTEREST 


275 


nate  what  we  have  in  view  by  speaking  of  the  portion  of  capital 
— old  as  well  as  new — that  is  “fluid”  or  “floating”  at  any  given 
time.  The  portion  of  what  is  already  invested  to  which  this 
term  can  be  applied  may  be  very  different  at  different  times  in 
the  same  business;  and  the  average  proportion  of  floating  to 
non-floating  capital  varies  very  much  in  different  branches  of 
industry ; such  variations  depending  partly  on  the  different 
lengths  of  time  for  which  capital  is  invested,  partly  on  the 
extent  to  which  it  exists  in  a form  adapted  solely  for  the  use  of 
the  particular  industry  in  which  it  is  actually  employed,  or  is 
available  for  one  or  other  of  the  new  opportunities  for  invest- 
ment that  present  themselves  h It  should  be  observed  that 
there  is  no  clearly  marked  separation  between  “ floating  ” and 
“ non-floating  ” : that  is,  the  loss  that  would  be  incurred  by  the 
removal  of  non-floating  capital  from  a business  is  different  for 
different  portions ; and,  in  fact,  may  vary  from  zero  upwards  to 
the  whole  value  of  the  capital.  Hence  any  rise  in  the  rate  of 
interest,  caused  by  an  increase  of  opportunities  of  new  profitable 
investment,  would  ceteris  paribus  tend  to  increase  the  amount 
of  capital  that  it  would  be  on  the  whole  profitable  to  withdraw 
from  old  investments;  and  this  increase  of  supply  would  tend 
somewhat  to  check  the  rise.  Still  it  is  only  the  supply  of 
capital  actually  floating  that  can  be  regarded  as  directly 
operative  in  determining  the  rate  of  interest. 

Let  us  consider,  then,  that  at  any  given  time  there  is  a 
quantum  of  floating  capital,  on  which — in  the  sense  before 
explained — the  rate  of  interest  tends  to  be  the  same ; and 

1 The  distinction  drawn  in  the  text  between  “ floating”  and  “non-floating” 
capital  appears  to  me  to  require  to  be  substituted,  in  this  and  similar  discussions, 
for  the  received  antithesis  of  “ fixed  ” and  “ circulating  ” capital.  I do  not  deny 
the  importance  of  the  difference — which  these  latter  terms  express — between 
instruments  that  aid  in  making  many  successive  products  of  the  same  kind, 
and  materials  that  are  spent  in  making  a single  product  and  of  which,  therefore, 
the  cost  has  to  be  repaid  from  the  price  of  that  one.  But  for  our  present 
purposes  this  is  not  the  distinction  required.  Capital  in  this  sense  “fixed” 
may  easily  have,  in  a given  case,  the  quality  that  I have  expressed  by 
“ floating  ” ; buildings,  for  instance,  may  be  transferable  without  loss  from  a 
less  to  a more  profitable  business : whereas  materials  may  be  non-transferable, 
as  they  may  be  only  useful  for  making  a particular  species  of  product — nor  can 
it  be  said  that  when  one  set  of  materials  has  been  exhausted  another  need  not 
be  purchased;  since  the  purchase  may  be  necessary  to  utilise  capital  fixed  in 
machines,  &c. 


18—2 


276 


POLITICAL  ECONOMY 


BOOK  II 


that  the  industrial  demand  for  this  is  furnished  by  the  whole 
aggregate  of  recognised  opportunities  for  employing  it  profitably 
that,  at  any  given  time,  the  existing  aggregate  of  non-floating 
capital  leaves  open, — which  we  may  call  the  effective  field  of 
employment.  The  manner  and  degree  in  which  this  field  tends 
to  be  extended  or  reduced,  as  the  rate  of  interest  falls  or  rises, 
will  vary,  of  course,  with  the  state  of  the  industrial  arts. 
But  it  is  obvious  that  when  interest  is  low,  other  things 
being  the  same,  the  cultivator  has  an  inducement  to  employ 
more  instruments  in  proportion  to  his  labourers ; the  trader 
can  afford  to  hold  stocks  of  goods  for  a longer  time;  and 
there  are  more  profitable  openings  for  new  lines  of  railway  and 
other  investments  involving  large  outlay  for  distant  returns. 
Similarly,  if  we  suppose  the  amount  of  capital  seeking  industrial 
employment  to  increase,  while  the  recognised  modes  of  em- 
ploying it  profitably  remain  unchanged,  we  may  infer  that  the 
rate  of  interest  tends  to  fall,  until  it  reaches  the  point  at 
which  it  will  seem  just  worth  the  employers’  while  to  use  the 
additional  increment  of  capital.  In  this  way  the  rate  of 
interest  on  floating  capital  generally  will  tend  to  be  equal  to 
the  ratio  borne  to  the  last  increment  of  such  capital  by  the 
amount  of  average  additional  wealth  expected  to  be  obtained 
by  employing  it,  alloiving  for  the  varying  interval  that  may 
elapse  before  the  produce  is  obtained,  and  subtracting  what  we 
may  call  the  “employer’s  fee”;  i.e.,  the  portion  of  produce  that 
the  employers  of  capital  will  retain  as  their  remuneration  for 
the  labour  of  management, — the  competitive  determination  of 
which  we  will  consider  more  particularly  in  a subsequent 
chapter^  The  general  function  of  capital  employed  in  in- 
dustry— as  we  have  before  seen — is  to  enable  the  ultimate 
net  produce  of  labour  to  be  increased  by  processes  which 
postpone  the  time  of  obtaining  it : but  the  opportunities  for 
effecting  this  result  profitably  will  of  course  vary  indefinitely, 
with  the  natural  resources  of  the  country,  its  stage  of  economic 
development,  the  density  of  its  population,  and  other  causes : 
there  is,  indeed,  no  one  of  the  conditions  of  production  analysed 
in  a previous  chapter^  which  may  not  exercise  some  influence 
on  them.  An  obvious  and  striking  cause  of  an  ample  field  of 

* See  c.  ix.  § 3. 

2 Book  I.  c.  iv. 


CHAP.  VI 


INTEREST 


277 


employment  is  found  in  the  natural  resources  of  a territory, 
thinly  colonised  by  an  advanced  industrial  population,  where 
the  amount  of  capital  already  invested  is  proportionally  small. 
But  in  considering  this  cause  we  must  avoid  the  mistake  of 
supposing — what  the  metaphor  in  our  term  “field”  perhaps 
suggests — that  each  new  investment  of  capital  tends,  in  pro- 
portion to  its  amount,  to  diminish  the  remaining  field : no 
doubt  it  has  this  effect  so  far  as  it  occupies  a particular 
opportunity ; but  it  may  easily  operate  to  a considerable 
extent  the  other  way,  by  creating  new  opportunities.  For 
instance,  in  the  present  state  of  industry,  after  a certain 
amount  of  capital — mainly  agricultural — has  been  invested  in 
a new  country,  it  becomes  profitable  for  the  first  time  to  invest 
further  capital  in  a railway ; and  then,  the  railway  being 
made,  further  investments  of  agricultural  capital  become  pro- 
fitable, which  were  not  so  before.  Similarly,  when  agriculture 
has  developed  to  a certain  extent,  extensive  employment  of 
capital  in  manufactures  becomes  profitable,  then,  in  conse- 
quence, further  developments  of  agriculture,  and  so  forth. 

But,  again,  supposing  that  the  available  natural  resources — 
as  at  present  understood — were  fully  turned  to  account,  and  that 
population  did  not  increase,  the  field  of  employment,  as  recent 
experience  has  shewn,  might  be  enlarged'  indefinitely  by 
the  progress  of  invention,  opening  out  new  ways  of  obtaining 
economic  gain  by  expending  labour  for  remote  results.  While, 
again,  if  we  suppose  that  the  arts  of  invention — including 
under  this  term  the  discovery  of  new  lines  of  trade,  and  any 
other  modes  of  improving  the  whole  system  of  co-operation 
through  exchange — remain  stationary ; and  also  that  the  habits 
and  faculties  of  the  working  part  of  the  population,  so  far  as 
these  are  important  in  production,  undergo  no  material  change ; 
the  industrial  demand  for  new  capital  at  the  existing  rate  of 
interest  could  only  be  kept  up  by  an  increase  of  population.  If 
this  increase  did  not  itself  tend  to  alter  the  average  efficiency 
of  labour,  or  the  share  of  the  produce  of  labour  secured  by 
the  employer  of  floating  capital,  there  would  obviously  be  a 
demand  of  uniform  intensity,  so  long  as  other  conditions  of 

' It  should  be  observed  that  I speak  of  the  field  of  employment  as  “enlarged,” 
when  there  is  room  for  more  capital  than  before  at  the  same  rate  of  profit ; not 
when  more  is  employed  at  a lower  rate. 


278 


POLITICAL  ECONOMY 


BOOK  II 


production  remained  stationary,  for  an  increase  of  capital  pro- 
portioned to  the  increase  of  population.  But,  as  I have  before 
argued*,  in  a country  so  thickly  populated  as  England,  each 
increment  of  capital  accompanying  and  proportioned  to  an 
increment  of  population  would  tend  to  be  somewhat  less  pro- 
ductive to  its  employers  than  the  preceding  increment,  and 
therefore  to  yield  a somewhat  lower  rate  of  interest, — apart  from 
improvements  in  production  due  to  other  causes, — since  the 
economic  loss  through  diminished  proportional  return  fi-om 
certain  kinds  of  labour  must  be  taken  to  outweigh  the  economic 
gain  from  increased  facilities  for  co-operation ; which,  moreover, 
would  be  partly  appropriated  by  the  owners  of  land  and  other 
capital  so  invested  as  to  be  partially  exempt  from  the  depre- 
ciative  effects  of  fresh  competition.  On  the  other  hand,  in  the 
societies  economically  the  most  advanced,  improvement  in  the 
arts  of  industry ’s  actually  progressing  continuously  and  rapidly; 
and  the  new  inventions  that  are  continually  made,  including 
the  extensions  of  international  trade,  are  mostly  of  such  a kind 
as  to  enlarge  the  field  of  employment  for  capital.  It  is  not 
easy  to  ascertain  the  balance  of  these  conflicting  tendencies 
in  any  given  country  at  any  particular  time ; still  less  can  we 
predict  with  any  definiteness  their  probable  operation  in  the 
future ; especially  since,  as  I have  before  said,  the  progress  of 
invention  may  conceivably  take  a decided  turn  in  the  direction 
adverse  to  the  employment  of  capital. 

§ 5.  In  investigating  the  factors  of  the  demand  for  capital 
in  any  country,  it  has  not  been  necessary  to  consider  the 
different  fields  of  emplo}Tnent  for  capital  furnished  by  different 
countries.  But  when  we  pass  to  study  the  conditions  of 
supply,  the  case  is  different ; since  the  attraction  exercised  on 
capital  by  foreign  fields  of  employment  is,  in  an  economically 
advanced  country  like  England,  one  of  the  most  powerful  causes 
of  variation  in  the  supply  for  home  investment.  In  the  present 
state  of  the  machinery  of  communication  and  international 
exchange,  the  most  enormous  masses  of  capital  can  be  trans- 
ferred with  the  greatest  facility  from  one  countiy  to  another: 
and  it  is  quite  conceivable  that  this  mobility  of  capital  may 
before  long  reach  a point  at  which  the  rate  of  interest  will  be 


Book  I.  c.  vi.  § 3.  See  also  the  next  chapter,  § 2. 


CHAP.  VI 


INTEREST 


279 


approximately  the  same  in  all  civilised  countries,  for  equally 
safe  investments ; so  that  the  whole  civilised  world  will 
admit  of  being  regarded  as  one  community,  for  the  purposes  of 
the  present  investigation.  And  we  may  conveniently  begin 
by  supposing  that  this  consummation  has  been  attained ; 
and  accordingly  examine  the  conditions  of  supply  of  capital 
in  an  isolated  region,  out  of  which  issues  no  overflow  of 
wealth  for  foreign  investment,  while  over  the  whole  range 
of  it  money  can  be  borrowed  at  the  same  rate  of  interest  on 
equally  good  security. 

The  investigation,  thus  defined,  is  one  which  we  have  already 
had  occasion  to  make  in  examining  the  Laws  of  Produc- 
tion h We  then  saw  that  the  conditions  of  more  or  less  rapid 
accumulation  of  capital  are  extremely  complex.  In  the  first 
place,  the  amount  that  may  be  saved  by  any  community  within 
any  given  period  tends  to  be  increased,  ceteris  paribus,  by  any 
cause  that  increases  the  real  income  of  the  community  during 
that  period ; that  is,  by  anything  that  increases  the  proportion 
of  the  number  of  effective  workers  to  the  whole  population, 
or  the  average  productiveness  of  their  labour.  Secondly,  the 
proportion  that  is  actually  saved  of  the  whole  amount  avail- 
able for  saving  tends  to  be  affected  by  any  variation  in  the  degree 
of  foresight  and  self-control,  of  capacity  for  being  influenced  by 
remote  pleasures  and  pains  as  compared  with  those  near  at  hand, 
possessed  by  average  members  of  the  community ; or,  again,  in 
the  habits  and  sentiments  that  move  men  to  provide  for  pos- 
terity; and,  further,  so  fixr  as  men  save  (as  many  in  the  wealthier 
classes  would  seem  to  do)  not  for  any  definite  end  but  because 
their  income  is  larger  than  is  needed  to  defray  their  habitual 
expenditure,  any  material  change  in  the  various  habits  of 
luxurious  consumption  prevailing  in  different  classes  is  likely 
to  affect  saving  materially.  It  did  not  seem  possible  definitely 
to  measure  the  combined  effect  of  these  and  other  causes ; but 
we  may,  I think,  assume,  on  the  one  hand,  that  ceteris  paribus 
saving  will  increase  or  decrease  in  amount,  as  the  rate  of 
interest  rises  or  falls ; and,  on  the  other  hand,  that  the  amount 
of  effect  thus  produced  within  a short  period  is  not  likely  to  be 
great  in  comparison  with  the  whole  amount  of  floating  capital ; 


' See  Book  i.  c.  vi.  § 4. 


280 


POLITICAL  ECONOMY 


BOOK  II 


SO  that  there  will  be  no  material  error  in  taking  the  rate  of 
interest  during  any  such  short  period  to  be  determined  entirely 
by  the  demand  for  capital.  But  when  we  consider  the  deter- 
mination of  the  average  rate  of  interest  over  a considerable  space 
of  time,  it  is  clear  that  the  effect  produced  on  saving  by  changes 
in  the  rate  of  interest  will  tend  to  give  this  average  rate  a 
steadiness  which  it  would  not  otherwise  possess ; since  any  rise 
in  the  rate  of  interest,  due  to  a change  in  the  conditions  of  de- 
mand, has  a certain  tendency  to  bring  about  a subsequent  fall 
through  the  increase  in  the  supply  of  capital  which  it  causes ; 
and  similarly  any  fall  in  the  rate  has  a certain  tendency 
to  cause  a subsequent  rise*.  This  compensatory  or  equilibratory 
action  of  changes  in  the  rate  of  interest  may  be  assumed  to 
become  more  powerful,  in  either  direction,  as  the  changes  them- 
selves increase  in  magnitude ; and  it  is  probable  that,  actually, 
in  every  existing  community  there  is  a point  considerably  above 
zero  below  which  the  rate  of  interest  could  not  long  remain 
without  some  great  change  in  the  intellectual,  moral,  or 
economic  condition  of  the  community,  as  well  as  a higher 
point  above  which  it  could  not  permanently  rise,  unless  we 
suppose  a development  of  the  arts  of  industry  quite  beyond 
precedent.  Where,  however,  these  points  will  be  we  have  no 
means  of  determining  d priori ; and  I may  add  that  I am 
aware  of  no  adequate  empirical  reason  for  supposing  with  Mill, 
Cairnes,  and  others,  that  the  rate  of  interest  in  England  at 
the  present  day  is  very  near  the  minimum  point. 

We  have  thus  obtained  a general  view  of  the  manner  in 
which  interest  would  be  determined  in  an  isolated  region,  over 
the  whole  of  which  the  rate  was  (with  the  qualifications  before 
given)  approximately  uniform.  Actually,  however,  we  find  ma- 
terial differences  in  the  rates  of  interest  maintained  in  different 
regions ; even  where  an  uninterrupted  trade  renders  it  easy  to 
transfer  capital  from  any  one  of  these  regions  to  any  other. 
The  explanation  of  these  differences  is  threefold.  First,  the 
general  security  of  capital  in  some  countries,  owing  to  inferiority 
in  political  organisation  or  other  causes,  may  be  materially  less, 
even  for  their  inhabitants,  than  that  maintained  in  others. 

* It  may  be  observed  that  experience  shews  another  way  in  which  a fall  in 
the  rate  of  interest  tends  to  bring  about  a subsequent  rise;  i.e.,  by  leading  to 
rash  speculations,  which  result  in  a destruction  of  capital. 


CHAP.  VI 


INTEREST 


281 


Secondly,  there  is  a certain  extra  risk  incurred  by  investing 
in  a distant  region,  owing  to  the  greater  difficulty  of  ascer- 
taining and  estimating  the  dangers  that  from  time  to  time  may 
threaten  the  yield  of  any  particular  investment,  and  in  taking 
measures  to  ward  them  off.  Thirdly,  there  seems  to  be  a 
general  tendency  in  the  members  of  any  society  to  estimate 
the  risk  of  investments  in  a foreign  country  more  highly,  ceteris 
paribus,  than  that  of  home  investments ; owing  to  their  greater 
confidence  either  in  the  morality  or  in  the  good  fortune  of  their 
own  community.  The  extent  to  which  each  of  these  causes  will 
operate,  as  between  different  countries  at  different  times,  will 
of  course,  vary  indefinitely.  We  can  only  lay  down  as  a general 
rule,  that  the  yield  of  capital  in  any  one  country  (A)  does  not 
tend  to  differ  from  the  yield  of  capital  in  any  other  country  (B), 
which  is  in  permanent  commercial  relations  with  the  former, 
by  an  amount  more  than  sufficient  to  compensate  for  the  extra 
risk  of  investments  in  B to  the  inhabitants  of  A,  as  estimated 
by  the  latter.  Thus  any  new  cause  that  operates  primarily  to 
increase  the  supply  of  capital,  and  consequently  to  lower  the 
rate  of  interest,  in  A,  tends  to  have  its  effect  extended  over  the 
whole  aggregate  of  countries  with  which  A is  in  commercial 
relations ; the  intensity  of  the  effect  being,  of  course,  diminished 
in  proportion  to  the  extension  of  its  ranged 

1 It  may  be  said  that  the  interest  received  by  members  of  any  one  community 
on  capital  employed  by  tbe  members  of  any  other  ought  not  strictly  speaking  to 
be  included  when  we  are  discussing  how  the  aggregate  produce  of  the  industry 
of  the  first  community  is  distributed.  But  there  are  two  reasons  for  not  leaving 
it  out  of  account  in  such  a discussion.  In  the  first  place,  even  if  this  interest 
were  merely  to  be  regarded  as  so  much  additional  income  for  certain  capitalists, 
the  transmission  and  consumption  of  which  did  not  directly  affect  the  shares 
received  by  other  members  of  the  community,  it  would  still  tend  to  affect  the 
latter  indirectly : since  the  mere  possession  of  this  extra  income,  from  whatever 
source  derived,  tends  to  give  its  possessors  and  their  children  certain  advantages 
in  the  competition  that  determines  the  relative  rewards  of  the  higher  kinds 
of  labour — as  will  be  hereafter  explained  (c.  ix.).  But,  secondly,  since  this 
“tribute,”  if  it  may  bo  so  called,  of  interest  is  actually  paid  by  transmitting 
the  produce  of  the  country  in  which  the  capital  is  invested,  its  payment  has  a 
direct  effect  on  the  whole  foreign  trade  both  of  the  country  that  sends  and  of 
the  country  that  receives  it.  The  exact  nature  and  extent  of  this  effect  depend 
upon  the  particular  conditions  of  supply  and  demand  of  the  wares  in  which  the 
trade  is  carried  on : but,  in  most  cases,  it  will  be  beneficial  to  all  the  inhabitants 
of  the  country  receiving  the  tribute,  so  far  as  they  are  consumers  of  imports : 
since  the  necessity  of  selling  the  commodities  in  which  the  tribute  is  paid,  in 
the  markets  of  the  receiving  country,  will  tend  to  establish  the  equation  of 


282 


POLITICAL  ECONOMY 


BOOK  II 


§ 6.  So  far  we  have  considered  interest  as  the  share  of 
produce  expected  by  the  capitalist  as  such ; since  it  is  the 
expectation  of  profit  that  determines  the  action  of  borrowers 
and  investors ; and  not,  except  indirectly,  the  profit  that  has 
been  earned.  If  now  it  is  asked  how  far  the  actual  average 
yield  of  newly  invested  capital  is  found  to  coincide  in  the  long 
run  with  the  expected  yield,  no  precise  answer  can,  I conceive, 
be  given.  Indeed,  even  if  we  could  obtain  accurate  statistics 
as  to  the  interest  actually  received,  it  would  still  be  impossible 
to  say  exactly  how  much  was  expected;  since  no  investment 
is  thought  to  be  absolutely  secure ; and  if  there  were  any  such, 
its  price,  for  reasons  before  given,  would  probably  exceed  that 
of  the  less  secure  by  more  than  adequate  compensation  for  risk : 
so  that  there  is  no  means  of  measuring  precisely  the  amount  of 
risk  commonly  recognised  in  those  esteemed  tolerably  safe.  We 
can  only  say  that  we  have  no  positive  grounds  for  supposing  that 
the  average  actual  yield  of  capital  already  invested  tends  in  the 
long  run  to  differ  materially  from  the  yield  expected  at  the  time 
of  investment.  Since,  however,  the  peld  expected  during  the 
first  years  after  investment  includes,  in  most  cases,  a more 
or  less  considerable  compensation  for  risk,  it  follows  that  the 
actual  average  yield  on  investments  made  some  time  ago  will 
tend  to  decrease  year  by  year,  as  the  date  of  original  investment 
recedes  into  the  past.  An  important  part  of  this  decrease,  in 
the  case  of  capital  invested  in  industrial  instruments,  is  due  to 
depreciation  through  the  progress  of  invention ; in  consequence 
of  which  the  yield  of  such  investments — provided  that  they  are 
completely  exposed  to  competition — tends  to  be  equal  to  interest 
at  the  current  rate  (allowing  for  risk)  not  on  the  sum  originally 
invested,  but  on  the  present  cost  of  producing  instruments 


international  demand  at  a rate  more  favourable  to  the  latter  than  would  other- 
wise be  the  case.  This  cheapening  of  imports  may  of  course  be  detrimental  to 
certain  producers  in  the  importing  country;  just  as  any  improvement  in  in- 
dustrial processes  is  liable  to  be  detrimental  to  some  possessors  of  previously 
invested  capital  and  acquired  skill. 

These  effects  are  of  course,  for  the  most  part,  indifferent  to  the  capitalist 
himself,  who  may  very  likely  not  consume  any  portion  of  the  commodities  in 
which  his  interest  is  paid ; and  who,  if  his  capital  has  been  lent  at  a fixed  rate 
of  interest,  only  feels  the  effects  of  changes  in  trade  so  far  as  the  fluctuations  of 
the  exchanges  alter  the  value  of  the  foreign  money  relatively  to  that  of  his  own 
country. 


CHAP.  VI 


INTEREST 


283 


equally  useful ; which  may,  of  course,  be  indefinitely  less  than 
the  cost  of  the  original  investment. 

There  is,  however,  an  important  part  of  the  capital  of  in- 
dividuals previously  invested  at  any  given  time,  which  enjoys  a 
total  or  partial  exemption  fi'om  the  depreciative  effects  of  com- 
petition ; being  so  invested  as  to  give  the  employer  who  uses  it, 
independently  of  his  own  skill  and  foresight,  advantages  in  pro- 
duction unattainable  by  other  employers — advantages  especially 
marked  in  a community  increasing  in  numbers  and  wealth. 
In  this  case  there  is  no  reason  why  its  owner  should  not  obtain 
from  it  a yield  considerably  above  what  interest  on  the  original 
outlay  would  amount  to.  The  most  conspicuous  case  of  this 
is  that  of  capital  invested  in  land.  The  share  of  produce 
obtained  by  the  land  owner  as  such — called  by  the  special  name 
of  Rent — has  attracted  the  special  attention  of  economists;  it 
will,  therefore,  be  well  to  devote  a separate  chapter  to  the 
examination  of  its  distinctive  characteristics ; especially  since, 
so  far  as  the  value  of  the  land  is  not  the  result  of  labour,  it 
is  only  “ capital  ” for  the  individual,  and  not  “ social  capital  ” as 
we  defined  the  term  in  Book  i. 


CHAPTER  VII. 


RENT. 

§ 1.  The  theory  of  value  given  in  chapter  ll.  was  expressly 
limited  to  material  products,  because  in  the  case  of  these  our 
main  attention  is  necessarily  given  to  analysing  the  combined 
action  of  cost  of  production  and  demand.  But  even  as  thus 
limited,  our  investigation  led  us  to  notice  cases  w^here  cost  of 
production  ceases  to  have  any  influence  on  the  variations  of 
value ; where,  accordingly,  value  is  determined  more  simply 
by  the  relation  of  demand  to  quantity, — quantity  being  either 
(1)  given  independently  of  the  price,  or  (2)  tending  to  increase 
somewhat  as  the  price  rises  with  the  demand,  so  as  partly  to 
counteract  the  changes  caused  by  variations  in  the  scale  of 
demand.  And  it  is  evident  that  these  simpler  modes  of 
determination  will  be  generally  applicable  to  commodities — 
if  there  be  such — that  are  not  products  of  labour  at  all. 
But  the  question  arises  where  we  are  to  look  for  such  com- 
modities ; for  what  we  call  “ raw  ” materials  almost  always 
require,  even  in  their  rawest  condition,  a not  inconsiderable 
amount  of  labour,  spent  either  in  somehow  promoting  or 
protecting  natural  growth,  or  in  extraction  or  detachment  (of 
stone,  wood,  &c.),  or  in  searching  or  hunting  and  capturing, 
or  at  any  rate  in  collection  and  conveyance.  In  short  we  are 
carried  back,  in  our  search  for  an  ultimate  raw'  material  among 
the  important  articles  of  current  exchange,  to  Land : i.e.,  to  such 
parts  of  the  earth’s  surface  as,  together  wdth  the  minerals  below 
the  surface,  have  a market  value,  as  the  indispensable  primar}’ 
material  or  instrument  of  the  kinds  of  labour  just  mentioned. 
And,  in  fact,  the  share  of  the  produce  that  falls  to  landowners 
as  such  has,  by  English  economists  generally,  been  treated  as 
fundamentally  distinct  from  Interest  and  Wages;  as  being  neither 


CHAP.  VII 


KENT 


285 


the  remuneration  of  labour,  nor  the  reward  of  abstinence  in  the 
consumption  of  the  products  of  labour.  And  it  is  to  this  share, 
as  separated  by  strict  analysis  from  interest  on  capital,  that  the 
term  “rent” — or,  as  is  sometimes  said,  “ economic  rent” — is  now 
commonly  applied,  when  used  as  a technical  term  by  political 
economists  since  Ricardo.  I think,  however,  that  what  is  com- 
monly known — and  widely  accepted — as  the  Ricardian  theory  of 
rent  combines,  in  a somewhat  confusing  way,  at  least  three 
distinct  theories,  resting  on  different  kinds  of  evidence  and 
relating  to  different,  and  not  necessarily  connected,  inquiries : we 
may  distinguish  them  as  (1)  a historical  theory  as  to  the  origin 
of  rent,  (2)  a statical  theory  of  the  economic  forces  tending 
to  determine  rent  at  the  present  time,  and  (3)  a dynamical 
theory  of  the  causes  continually  tending  to  increase  rent,  as 
wealth  and  population  increase.  It  seems  to  me  that  the 
confusion  of  these  three  into  one  doctrine  is  partly  the  effect 
and  partly  the  cause  of  the  peculiar  meaning  given  to  the 
term  Rent  in  Ricardo’s  exposition;  and  that  in  the  case  of 
agricultural  land,  to  which  Ricardo’s  doctrine  has  been  especi- 
ally applied,  it  is  especially  important  to  get  rid  of  the  con- 
fusion. 

In  attempting  this  task,  it  is  convenient  to  begin  by  ex- 
amining the  ordinary  use  of  the  term  Rent.  As  commonly 
used  in  English  \ it  denotes  the  payment  made  for  the  use 
of  “immovables,”  i.e.,  either  of  the  surface  of  land  as  used 
in  agriculture,  or  of  buildings  erected  on  it,  or  of  the  minerals 
it  contains  together  with  the  right  of  removing  and  selling 
them.  There  is,  apart  from  any  economic  theory,  a noteworthy 
difference  in  the  nature  of  the  obligations  imposed  in  the  lend- 
ing or  letting  of  land,  houses,  &c.,  as  compared  with  ordinary 
loans  for  which  interest  is  paid.  In  the  latter  case,  as  what  is 
actually  borrowed  is  money,  there  is  no  particular  thing  which 
has  to  be  returned  when  the  loan  is  repaid,  but  only  an  equiva- 
lent for  the  sum  borrowed ; so  that  here  the  possibility  of  dete- 
rioration or  amelioration  of  the  wealth  borrowed  does  not  come 
in ; whereas  in  the  cases  where  rent  is  paid,  this  possibility  has 
to  be  taken  into  account ; and  sometimes,  as  we  shall  see,  leads 

1 It  may  be  worth  noticing  that  in  French  “rente”  is  used,  more  widely,  to 
denote  any  income  that  accrues  without  labour  on  the  part  of  the  person  to 
whom  it  is  paid. 


286 


POLITICAL  ECONOMY 


BOOK  II 


to  important  complications.  Still,  rent  is  not  the  only  case  of 
payment  for  the  use  of  wealth,  where  the  same  thing  that  was 
originally  lent  has  to  be  restored  when  the  contract  terminates : 
such  payments  are,  for  example,  made  for  the  use  of  carriages, 
boats,  plate,  pianos,  and  other  durable  articles.  The  amount  of  such 
payment  (commonly  called  “hire”),  as  competitively  determined, 
will  commonly  include  compensation  for  ordinarj'  deterioration 
through  wear  and  tear  of  the  thing  hired,  interest  on  its  value 
when  let',  and — in  some  cases  at  least — insurance  against  pos- 
sible depreciation  through  invention  or  change  of  fashion,  as 
well  as  against  other  risks,  together  with  such  amount  of  remu- 
neration for  the  owner’s  labour  of  management  as  industrial 
competition  may  allow  him. 

Now  an  English  farm,  no  less  than  a carriage  or  a boat,  is  an 
instrument  that  has  been  adapted  to  its  uses  by  human  labour ; 
it  commonly  contains  fences,  roads  for  economising  the  labour 
of  conveyance,  and  buildings  for  housing  cattle  and  instruments, 
accumulating  manure,  and  performing  the  first  processes  of 
manufacture  on  the  produce ; and  further,  in  many  cases,  when 
it  was  originally  made,  the  land  had  to  be  wholly  or  partially 
cleared  of  stones,  trees,  excess  of  water,  or  other  encumbrances. 
It  may  be  asked,  therefore,  why  the  price  paid  for  the  use 
of  land  thus  prepared  and  adapted  should  not  depend  upon 
the  cost  of  such  adaptation  no  less  than  the  price  of  any  other 
durable  product. 

To  this  question  Ricardo  and  others  answer  that  so  far  as 
the  utility  of  a farm  is  the  result  of  labour,  the  price  paid  for 
the  use  of  it  should  in  strictness  of  economic  language  be 
counted  profit  or  interest^;  the  term  Rent  being  restricted  to 
the  price  paid  for  the  use  of  the  “ original  and  indestructible 
“ powers  of  the  soil,”  or  the  yield  obtained  by  the  o'wner  from 
this  source,  where  the  owner  is  also  the  cultivator.  But  the 
line  thus  indicated  is  one  impossible  to  draw  with  any  exactness 
in  concrete  cases,  at  least  in  a countr}'  that  has  long  been  culti- 
vated ; and,  as  Ricardo  himself  urges,  it  is  in  such  a countrj' 

1 The  value  of  such  an  article  when  let  will  normally  (as  we  have  seen) 
correspond  to  the  cost  of  producing  something  equally  useful.  See  c.  ii.  § 11. 

2 In  England  this  price  is  hardly,  if  at  all,  more  than  ordinary  interest, 
with  a slight  allowance  for  risk ; the  landlord  who  spends  the  money  requires 
little  or  no  remuneration  for  his  trouble. 


CHAP.  VII 


EENT 


287 


that  rent  is  of  most  importance.  The  recurrent  part  of  the 
expenditure  of  labour  in  making  a farm — the  cost  of  the  repairs 
needed  from  time  to  time  to  keep  buildings,  fences,  drainage, 
&c.  in  good  order — can,  no  doubt,  be  approximately  ascertained; 
and  so  long  as  it  is  profitable  to  cultivate  the  farm  at  all,  its 
produce  must  yield  at  least  interest  on  this  cost,  as  well  as 
adequate  employers’  profits  on  the  movable  capital  employed  on 
the  land.  But  this  recurrent  cost  is,  on  the  whole,  materially 
less  than  the  total  expenditure  that  would  now  be  required 
to  bring  the  farm  from  its  original  condition  up  to  its  present 
degree  of  utility;  and,  as  we  cannot  restore  the  original  condi- 
tion, we  have  no  means  of  estimating  definitely  this  non-recur- 
rent expenditure. 

This  will  appear  more  clearly  when  it  is  considered  that 
we  should  have  to  include  in  such  an  estimate,  besides  the 
labour  spent  on  the  farm  itself,  a certain  part  of  what  has  gone 
to  the  making  of  the  roads,  canals,  and  railways  that  connect 
it  with  the  markets  of  its  produce,  and  with  the  places  that 
supply  the  materials  and  implements  of  its  cultivation;  since 
the  existence  of  these  means  of  communication  is  generally 
necessary  to  the  maintenance  of  the  present  value  of  the 
produce  of  the  land,  and  therefore  to  the  maintenance  of  the 
rent^ 

At  the  same  time  I think  it  reasonable  to  assume  that  the 
rent  of  much  agricultural  land  in  England  is  materially  in 
excess  of  interest  (at  the  present  rate)  on  the  expenditure  that 
would  now  be  required  to  bring  it  from  its  original  condition  to 
its  present  degree  of  efficiency  for  supplying  its  markets  with 
agricultural  produce.  I infer  this  from  the  fact  that  it  is  worth 
while  for  Englishmen  to  cultivate  land  in  Manitoba  in  order  to 

1 It  is  true,  as  Mill  argues  (ii.  xvi.  § 5)  that  the  rent  of  a farm  tends  primarily 
to  be  reduced  by  the  roads,  &c.  that  connect  with  its  markets  other  more  distant 
farms  ; since  these  are  thus  enabled  to  enter  into  competition  with  it  and  to 
lower  the  prices  of  its  produce.  But  though  this  is  no  doubt  the  immediate  effect 
of  making  such  roads,  it  is  not,  I conceive,  likely  to  be  the  ultimate  effect  in  this 
case,  any  more  than  in  the  case  of  any  other  kind  of  agricultural  improvement ; 
since  the  increase  of  population  and  wealth  in  the  country,  which  these  more 
extended  means  of  communication  render  possible,  tends  ultimately  to  raise  the 
price  of  the  produce  of  the  nearer  farm  to  at  least  its  former  height.  And, 
at  any  rate,  the  labour  spent  on  the  roads  that  connect  a farm  with  its  markets 
must  be  admitted  to  have  contributed  to  raise  its  selling  value  and  the  rent 
payable  for  it. 


288 


POLITICAL  ECONOMY 


BOOK  n 


supply  the  English  market  with  wheat : for,  though  I cannot 
compare  the  original  condition  of  land  in  Manitoba  'wdth  the 
original  condition  of  land  in  England,  I have  no  reason  to 
attribute  to  the  former  so  marked  a superiority  for  wheat- 
growing over  all  English  land  as  would  even  nearly  compensate 
for  the  great  disadvantage  of  its  situation.  .Hence  I infer, 
broadly,  that  a considerable  portion  of  the  rent  paid  for  agricul- 
tural land  in  England — though  I cannot  say  how  much — is  due 
not  to  the  labour  spent  in  fitting  it  for  agricultural  uses,  but  to 
the  appropriation  of  the  raw  material  to  which  such  labour  has 
been  applied.  It  appears  to  me,  however,  misleading  to 
say  that  even  this  portion  is  a price  paid  for  the  “original 
“and  indestructible”  qualities  of  the  soil;  since,  so  far  as  it 
depends  on  situation,  it  is  plainly  due  not  to  the  original 
qualities  of  the  land  but  to  the  development  of  the  human 
community  inhabiting  it,  and  the  manner  in  which  this  com- 
munity has  disposed  itself  over  the  surface  of  the  countrv". 

I am  unable,  therefore,  to  accept  as  adequate  Ricardo’s  account 
of  the  origin  and  history  of  rent  as  defined  by  him : namely, 
that  it  is  entirely  caused  and  its  amount  determined  by  original 
differences  in  the  productive  powers  of  the  soil,  which  become 
economically  operative  in  continually  increasing  degrees,  as 
population  progresses;  that  accordingly  it  is  first  paid  on  “land 
“ of  the  first  quality”  when,  in  the  progress  of  society  land  of 
the  “ second  quality”  is  taken  into  cultivation,  and  rises 
similarly  with  “every  step  in  the  progress  of  population,  which 
“obliges  a country  to  have  recourse  to  land  of  a worse  quality.”^ 
This  conjectural  history  assumes  unwarrantably  that  the  re- 
lative degrees  of  utility  for  agriculture  possessed  by  different 
portions  of  the  land  of  a civilised  country  remain  always  what 
they  originally  were ; ignoring  (1)  the  extent  to  which  the 
labour  of  man  has  altered  the  original  differences,  and  (2)  the 
extent  to  which  the  economic  value  of  land  varies,  apart  fi-om 
any  variation  in  its  physical  conditions,  in  consequence  of 
changes  (a)  in  the  art  of  agriculture,  and  (b)  in  the  social  demand 
for  agricultural  produce. 

But  even  if  Ricardo’s  historical  doctrine  were  true,  and 
if  we  could  generally  distinguish,  in  any  actual  case,  between 


^ See  Kicardo,  Principles  of  Political  Economy,  c.  ii. 


CHAP.  VII 


RENT 


289 


the  “ original  and  indestructible  ” qualities  of  the  soil  and  the 
qualities  resulting  from  human  labour,  the  distinction  would 
still,  I conceive,  be  irrelevant  when  we  are  considering  the 
determination  of  rent,  as  an  element  of  the  existing  distribu- 
tion of  produce ; since  the  price  paid  for  the  use  of  land  at  the 
present  time  cannot  be  affected  in  any  way  by  the  extent  to 
which  its  present  condition  is  the  result  of  labour.  Hence,  while 
I recognise  that  ordinary  agricultural  rent  generally  contains 
— besides  an  element  that  is  to  be  regarded  as  interest 
on  the  present  value  of  the  results  of  labour  previously 
expended — another  element  due  to  the  appropriation  of  a raw 
material  scarce  in  quality,  it  does  not  seem  to  me  desirable 
to  follow  Ricardo  in  restricting  the  term  rent  to  the  latter 
element. 

It  is,  in  fact,  chiefly  when  we  are  considering  what  I 
distinguished  as  a “ dynamical  question  ” — the  tendency  of  the 
value  (and  rent)  of  land  to  increase  as  civilisation  progresses 
— that  it  becomes  practically  important  to  analyse  its  utility 
into  different  elements,  due  respectively  to  the  different  causes 
above-mentioned ; though  here  again  what  we  are  chiefly  con- 
cerned to  know  with  regard  to  any  particular  increase  of  rent  is 
not  whether  it  is  due  to  labour  generally,  but  whether  it  is  due 
to  labour  employed  by  the  oivner  or  occupier.  This  dynamical 
question  will  be  more  appropriately  considered  in  a subsequent 
chapter*. 

§ 2.  Let  us  take  the  term  “ rent”  then  in  its  ordinary  sense 
to  mean  the  price  paid  for  the  use  of  land,  whatever  be  the 
source  of  its  utility,  and  consider  how  this  price  is  completely 
determined  in  such  a country  as  England  at  the  present  time. 
So  far  as  the  demand  for  land  is  non-industrial, — i.e.,  so  far  as 
land  is  used  for  purposes  of  direct  enjoyment  and  thus  belongs  to 
the  class  of  things  before  distinguished  as  “ durable  consumers’ 
“wealth,” — there  is  not  much  use  in  attempting  any  minute 
analysis  of  the  causes  that  affect  its  value  or  rent.  We  have  no 
simple  formula  for  determining  generally  how  much  will  be  paid 
for  the  use  of  (e.g.)  a deer-forest.  We  can  see  that  it  depends 
partly  on  the  amount  of  actual  and  possible  deer-forests,  partly 
on  the  possibility  of  making  a profit  out  of  such  land  in  other 


s.  P.  E. 


* See  chapter  xi.  § 8,  pp.  382,  3. 


19 


290 


POLITICAL  ECONOMY 


BOOK  11 


ways,  partly  on  the  number  and  wealth  of  the  rich  persons  who 
wish  to  shoot  deer,  and  on  the  comparative  utility  of  deer-stalking 
and  other  forms  of  amusement,  as  estimated  by  these  persons  ; 
but  it  is  hardly  worth  while  to  attempt  to  get  further  than  this. 
In  the  case,  however,  of  land  cultivated  by  farmers  for  a profit, 
we  can  determine  normal  rent  as  the  surplus  which  the  price  of 
its  produce  would  be  expected  to  afford  to  a farmer  of  ordinary 
ability  and  industry,  after  subtracting  whatever  competition 
allows  him  to  claim,  as  remuneration  for  his  own  labour,  and  the 
sum  required  for  replacement,  with  interest  at  the  ordinarj"  rate, 
of  the  capital  employed  by  him  upon  the  land ; assuming,  for 
simplicity,  that  the  processes  by  which  such  pioduce  is  obtained 
do  not  materially  affect  the  utility  of  the  land,  as  an  instrument 
of  future  production.  If  the  produce  in  question  needs  a special 
and  rare  kind  of  land,  while  the  demand  for  it  is  strong,  every 
part  of  the  land  so  employed  may  yield  produce  that  has  a 
value  above  what  corresponds  to  its  cost  of  production  (including 
interest  on  the  landowner’s  capital  that  has  to  be  from  time  to 
time  reproduced).  Of  such  produce  it  may  be  said  that  the 
price  of  every  portion  yields  a certain  proportion  of  rent  to  the 
owner ; though  it  tends  to  confuse  cause  and  effect  to  say  that 
“ rent  enteis  into  its  price.”  But  with  ordinary  ag^cultural 
produce  the  case  is  different ; since,  even  in  a country'  so  thickly 
populated  as  England,  the  supply  of  land  capable  of  yielding 
such  produce  is  always  in  excess  of  that  actually  employed  for 
this  purpose.  Hence  assuming  that  the  variations  in  the  utility 
of  land — whether  due  to  varying  fertility  or  situation — are 
continuous’,  we  may  infer  that  even  when  the  demand  for 
agricultural  produce  is  so  keen  that  the  area  of  cultivated  land 
is  increasing,  there  will  always  be  a margin  of  such  land  of 
which  the  rent  is  only  equivalent  to  interest  on  the  outlay 
required  to  prepare  and  keep  it  fit  for  cultivation,  phcs  whatever 
would  be  paid  for  the  use  of  it  if  left  uncultivated,  for  purposes 
of  sport  or  rough  pasture.  And  we  may  infer  that  the  normal 
rent  per  acre  of  any  other  land,  in  the  same  district  or  suppljdng 
the  same  markets,  can  only  exceed  the  rent  per  acre  of  this 


1 This  assumption  is  legitimate  for  purposes  of  general  reasoning : since  it 
will  be  true  unless  abrupt  changes  in  fertility  coincide  with  abrupt  changes  in 
situation. 


CHAP.  VII 


RENT 


291 


margin  because  and  in  proportion  as  it  is  more  productive 
relatively  to  the  markets  which  it  has  to  supply ; i.e.,  because 
and  in  proportion  as  the  farmer  who  cultivates  it  can  bring  to 
market  either  more  produce  with  equal  expense,  or  an  equal 
amount  of  produce  with  less  expense  (including  the  expense . of 
conveyance). 

This  is  the  “ margin  of  cultivation  ” which  is  said  by 
Ricardian  economists  to  pay  “ no  rent  ” : the  phrase,  however, 
is  not  strictly  true,  even  according  to  the  Ricardian  definition 
of  rent,  in  such  a country  as  England;  since,  as  I have  said, 
something  would  be  generally  obtainable  for  the  use  of  such 
land  if  left  uncultivated*.  It  is  further  noteworthy,  that  when 
the  area  of  arable  land  is  diminishing, — as  has  been  the  case  in 
recent  years  in  England, — the  margin  of  cultivation  tends  to  be 
differently  determined.  When  land  has  to  be  brought  into 
cultivation  it  will  be  expected  to  pay  interest  on  the  expenditure 
required  once  for  all — e.g.,  for  draining  or  clearing — to  make  it 
fit  for  cultivation,  as  well  as  on  any  recurrent  outlay  required 
to  keep  it  in  suitable  condition : but  in  considering  whether 
it  should  be  allowed  to  go  out  of  cultivation,  the  non-recurrent 
expenditure  will  not  be  taken  into  account ; the  land  will  be 
worth  cultivating,  if  the  cultivator  can  afford  to  pay  interest 
merely  on  any  recurrent  outlay  required  fi"om  the  landowner 
plus  what  could  be  obtained  for  the  use  of  it  if  uncultivated. 
It  is  owing  to  this  essential  difference  in  the  determination  of 
the  margin  of  cultivation,  according  as  the  area  of  cultivated 
land  is  increasing  or  decreasing*,  that  I have  not  thought 
it  desirable  to  refer  expressly  to  this  margin  in  the  account 
above  given  of  the  determination  of  normal  agricultural 
rent. 

There  is,  however,  an  ambiguity  in  this  account  which  has 
to  be  removed.  It  is  evident  that  the  surplus  remaining,  after 

* Doubtless  there  is  always  some  land  to  be  found,  even  when  the  area  of 
cultivated  land  is  increasing,  which  only  yields  a rent  equivalent  to  interest  on 
the  outlay  necessary  to  make  and  keep  it  fit  for  cultivation : but  this  is  because 
such  outlay  has  been  partly  wasted,  if  the  land  would  have  yielded  some  rent 
in  its  unlaboured  condition  : it  does  not  represent  the  general  result  which 
economic  forces  tend  to  produce. 

^ If  the  area  of  cultivation  is  stationary,  the  normal  rent  of  the  least 
advantageous  may  vary  between  interest  on  total  outlay  and  interest  on 
recurrent  outlay. 


19—2 


292 


POLITICAL  ECONOMY 


BOOK  II 


providing  interest  on  the  farmer’s  capital  and  remuneration  for 
his  labour,  may  vary  with  the  amount  of  capital  employed. 
Now  in  a state  of  thoroughly  active  and  enlightened  compe- 
tition and  abundant  capital  we  may  assume  that  the  amount 
of  capital  employed  on  any  land  yielding  rent  would  be  at  least 
sufficient  to  make  the  net  produce  per  cent,  a maximum ; for 
if  it  were  not  so,  it  would  be  obviously  profitable  to  leave  the 
less  productive  land  uncultivated,  and  apply  the  capital  thus 
set  free  in  increasing  that  employed  on  the  more  productive. 
But,  actually,  we  often  find  the  more  fertile  land  is  not  culti- 
vated up  to  the  point  at  which  the  net  produce  per  cent,  of 
capital  is  greatest,  either  (1)  from  custom,  or  (2)  from  want  of 
enlightenment,  or  (3)  because  the  best  mode  of  cultivation 
requires  amounts  of  capital  under  single  managements,  larger 
than  average  farmers  can  provide  themselves  or  procure  by 
borrowing.  So  far  as  these  causes  operate,  rent  will  actually 
tend  to  be  determined  not  by  the  surplus  of  produce  obtainable 
by  the  capital  that  it  would  be  most  profitable  to  employ,  but 
by  the  surplus  of  produce  obtainable  by  what  an  average  farmer 
would  employ. 

But  further,  if,  when  the  most  productive  land  is  cultivated 
so  that  its  net  produce  per  cent,  of  capital  employed  is  greatest, 
it  is  still  profitable  to  employ  capital  less  productively  on  other 
land,  it  must  also  be  profitable  to  cultivate  the  more  productive 
land  beyond  the  point  at  which  the  net  produce  per  cent,  is  a 
maximum : provided  we  assume  that,  after  this  point  is  passed, 
the  diminution  in  the  increment  of  produce  obtainable  bv 
an  additional  increment  of  farming  capital  is  continuous  and 
gradual.  Indeed  on  this  assumption,  it  will  be  ob%uously 
profitable  to  employ  additional  capital  on  the  more  productive 
land  up  to  the  point  at  which  another  increment  would  not 
yield  ordinary  interest  and  “ wages  of  management  ” : so  that 
we  may  infer  that  the  last  portion  of  the  capital  employed 
tends  to  pay  no  rent ; meaning  that  the  farmer  does  not 
tend  to  get,  by  employing  it,  any  additional  surplus  which 
active  competition  would  force  him  to  resign  to  the  landlord. 
This  assumption  of  a “ rentless  ” margin  of  agricultural  capital, 
in  the  farming  even  of  highly  rented  land,  is,  I think,  legitimate 
for  purposes  of  general  reasoning : since  no  one  doubts  that 
only  a limited  amount  of  capital  can  be  profitably  employed 


CHAP.  VII 


RENT 


293 


for  agricultural  purposes  on  any  given  piece  of  land : and, 
considering  the  various  ways  in  which  labour*  may  be  employed 
directly  and  indirectly  to  increase  produce,  we  may  assume 
that — generally  speaking— the  limit  of  profitable  employment 
does  not  coincide  with  the  point  at  which  net  produce  per  cent. 
of  capital  is  greatest,  but  is  reached  by  a gradual  decline  in 
the  productiveness  of  capital  employed  beyond  this  point.  It 
is,  however,  misleading  to  speak — as  Ricardian  economists  have 
sometimes  spoken — of  the  “ last  dose  of  capital  which  pays  no 
“ rent  ” as  if  this  “ dose  ” were  an  element  definitely  ascertain- 
able in  the  business-reckonings  of  an  ordinary  farmer,  and 
could  be  used  for  calculating  normal  rent  in  any  particular 
case.  Experience  certainly  shews  us  in  a broad  and  general 
way  that  as  the  demand  for  the  produce  of  land  rises,  there 
is  a tendency  to  increase  the  amount  of  capital  applied  to 
good  land,  as  well  as  to  extend  the  cultivated  area : but 
the  art  of  agriculture  has  not  yet  reached  the  degree  of 
exactness  that  would  be  required  to  ascertain  even  approxi- 
mately in  any  particular  case  the  portion  of  capital  that  is  to  be 
regarded  as  paying  no  rent.  Thus,  while  the  recent  fall  in  the 
value  of  English  wheat,  in  consequence  of  tiie  development  of 
foreign  production  and  trade,  has  led  to  a marked  diminution 
in  the  area  of  wheatgrowing  land  in  England,  I cannot  find 
that  it  has  led  to  anything  like  an  equally  discernible  change 
in  the  amount  of  capital  economically  applicable  to  the  land 
that  still  grows  wheat.  The  most  that  can  be  said  is  that  the 
fall  of  prices  has  caused  a general  vague  tendency  to  diminish 
expense  in  farming  wherever  it  can  be  diminished : and  even 
this  is  in  many  cases  merely  due  to  loss  of  capital, — and  is,  in 
consequence,  a tendency  to  farm  more  cheaply  than  is  really 
economical. 

§ 3.  Hitherto  we  have  assumed  that  the  value  of  the  land 

* The  reader  will  bear  in  mind  that  “employment  of  labour”  is,  from 
another  point  of  view,  “employment  of  capital”:  since  the  result  of  the  labour 
is  a form  which  a part  of  the  employer’s  capital  assumes.  But  the  phrase 
“employment  of  capital”  is  generally  more  appropriate:  since  in  calculating 
the  cost  of  any  application  of  labour  we  have  to  take  into  account  not  only 
the  amount  and  quality  of  the  labour  applied,  but  the  time  intervening  between 
its  application  and  the  realisation  of  the  e.xpected  produce  : that  is,  we  have  to 
regard  the  results  of  labour  as  constituting  capital,  on  which  interest  is 
expected. 


294 


POLITICAL  ECONOMY 


BOOK.  11 


is  not  materially  altered  by  the  process  of  production.  It  may, 
however,  happen  that  by  using  the  land  in  the  way  that  is 
economically  most  advantageous  on  the  whole,  the  producer 
will  either  improve  or  deteriorate  it.  No  difficulty  is  thereby 
introduced  in  the  theoretical  determination  of  rent,  where  the 
producer  is  also  the  owner ; we  have  merely  in  calculating  the 
whole  amount  of  produce  to  include  the  increment  of  value 
added  to  the  land,  along  with  the  value  of  the  products 
taken  from  it ; and  similarly  to  deduct  from  produce  any 
decrement  due  to  deterioration.  When,  however,  the  producer 
does  not  own,  but  merely  farms,  the  land,  this  possibility  of  im- 
provement and  deterioration  renders  it  a matter  of  some  difficulty 
to  frame  a rent-contract  which  shall  give  the  farmer  adequate 
inducement  to  treat  the  land  in  the  manner  most  economical 
on  the  whole.  To  illustrate  this  difficulty  let  us  suppose,  first, 
that  the  land  tends  to  be  improved  by  such  treatment  as 
is,  on  the  whole,  economically  desirable.  Here  we  have  to 
distinguish  two  different  cases.  (1)  If  the  farmer,  while 
using  the  land  in  the  way  most  immediately  profitable,  at 
the  same  time  augments  its  utility  as  an  instrument  of  future 
production,  the  matter  may  be  simply  settled  by  allowing  the 
increment  of  value  to  be  appropriated  by  the  landlord ; since, 
in  this  case,  such  appropriation  has  no  tendency  to  prevent  the 
improvement  from  being  made.  But  (2)  if,  as  is  more  ordi- 
narily the  case,  the  outlay  required  for  the  improvement  vull 
not  be  profitable  to  the  firrmer,  unless  he  secures  the  whole,  or 
the  main  part,  of  the  gain  resulting  from  the  increased  utility 
of  the  land ; it  will  be  his  interest  to  leave  the  land  unimproved 
unless  either  he  is  bound  under  penalties  to  improve  it,  or 
this  gain  is  somehow  secured  to  him.  The  former  alternative 
can  hardly  be  made  effectual  without  hampering  the  farmer’s 
freedom  of  action  to  an  extent  disadvantageous  to  his  industr}'. 
Hence,  in  order  that  such  improvements  may  be  duly  made,  it 
will  be  needful  that  either  (1)  adequate  compensation  be  secured 
to  the  farmer  generally  for  whatever  increment  of  utility  may 
remain  unexhausted  when  his  tenure  ends ; or  (2)  a lease  be 
given  him — and  continually  renewed — of  such  length  as  always 
to  allow  him  adequate  prospect  of  reaping  the  benefit  of  his 
improvements ; or  (3)  each  improvement  be  made  the  subject 
of  special  agreement  between  farmer  and  landlord — which 


CHAP.  VII 


RENT 


295 


practically  requires  the  latter,  or  his  agent,  to  take  a certain 
share  in  the  management  of  the  farm. 

A somewhat  similar  problem  is  presented  in  the  case  where 
the  land  is  deteriorated  by  the  most  economic  use  of  it.  This 
case  occurs  but  rarely  in  agriculture';  but  it  is  the  ordinary  con- 
dition of  the  mining  industry,  and  of  certain  other  branches  of 
production  which  take  from  the  land  products  that  are  not  re- 
newed In  such  cases  the  total  amount  of  the  produce  in  question 
that  can  be  profitably  taken  from  any  particular  piece  of  land 
is  generally  at  least  so  far  limited  in  prospect,  that  every  portion 
brought  to  market  tends  to  diminish  proportionally  such  possi- 
bilities of  future  production  as  have  a definite  market  value®. 
The  problem,  then,  in  letting  land  for  the  purposes  of  any  such 
industry  is  to  frame  a contract  which  shall  render  it  not  the 
interest  of  the  lessee  to  remove  and  sell  an  amount  of  such 
products  greater  than  what  it  would  be  profitable  for  him  to 
bring  to  market  if  he  were  also  the  owner.  Now  if  the  land  in 
question  is  leased  at  a fixed  rent,  this  coincidence  of  interests 
will  only  occur  under  certain  special  conditions.  Thus,  if  owing 
to  the  state  of  competition  in  the  industry  the  owner  would  be 
unable  to  raise  the  price  of  his  product  materially  by  limiting 
his  supply,  if  he  has  no  ground  for  inferring  a rise  of  any  im- 
portance from  the  general  prospects  of  supply  and  demand,  and 
if  the  cost  of  production  does  not  become  materially  greater  as 
the  amount  produced  within  any  given  time  increases — it  would 
then  be  the  owner’s  interest  to  produce  as  much  as  possible, 
provided  that  the  price  of  the  product  were  sufficient  to  pay  at 
least  the  working  expenses  of  production,  including  adequate 
remuneration  for  the  labour  of  management ; and  under  the 
same  circumstances  it  would  be  the  interest  of  a lessee  paying  a 

' Land  used  for  agriculture  might  doubtless  often  be  deteriorated  by  treat- 
ment which,  though  uneconomic  on  the  whole,  would  increase  its  produce  for 
one  or  two  years.  And  there  would  seem  to  be  some  practical  difficulty  in 
framing  a contract  to  prevent  this  effectually,  without  interfering  disad- 
vantageously  with  the  farmer’s  freedom  of  action  ; but  it  is  hardly  within 
the  scope  of  the  present  chapter  to  discuss  the  best  method  of  dealing  with  this 
difficulty. 

^ Such  as  (e.g.)  Peruvian  guano,  timber  from  natural  forests,  &c. 

® This  is  true  even  in  the  case  of  mines  where  the  prospect  of  actual  ex- 
haustion is  too  remote  and  indefinite  to  be  economically  important ; owing  to 
the  prospective  increase  in  difficulty  of  extraction,  at  least  after  a certain  amount 
has  been  taken. 


296 


POLITICAL  ECONOMY 


BOOK  n 


fixed  rent  to  do  the  same.  If,  however,  the  owner  would  either 
have  reason  to  expect  a rise  in  price,  or  be  able  to  produce  such 
a rise  by  limiting  his  supply,  either  alone  or  in  combination 
with  other  producers ; then  it  would  obviously  be  expedient  for 
him  not  to  produce  beyond  the  point  at  which  the  probable  rise 
in  price,  present  and  prospective,  would  more  than  compensate 
for  the  probable  loss  incurred  by  deferring  production.  But, 
in  these  circumstances,  it  would  not  generally  be  expedient  for 
a lessee  to  adopt  the  same  limit  of  production ; unless  the  period 
of  the  lease  were  long  enough  to  make  it  practically  certain 
that  the  mine  would  be  valueless  before  the  end  of  it : since 
otherwise,  by  stopping  at  any  given  point,  the  lessee  would  lose 
the  whole  gain  obtainable  on  the  extra  amount  that  might  have 
been  produced,  whereas  the  owner  would  only  lose  the  interest 
on  this  gain  for  a certain  number  of  years.  In  the  same  way  it 
may  be  shewn  that  if  there  is  a certain  amount  that  can  be 
produced  within  a given  time  by  the  most  economic  appUcation 
of  labour  and  capital,  while  it  is  still  possible  to  produce  more 
but  at  continually  increasing  cost,  it  would  generally  be  ex- 
pedient for  a mere  lessee  to  extend  production  beyond  the  limit, 
which  it  would  be  expedient  for  an  o^vner  to  adopt.  In  either 
of  these  latter  cases  it  seems  impossible,  vuthout  more  foresight 
of  the  conditions  of  the  market  than  can  be  hoped  for,  to  frame 
a rent-contract  which  will  have  the  effect  of  making  it  always 
most  profitable  for  the  lessee  to  treat  the  land  in  question  in 
the  manner  most  profitable  to  the  ovmer:  but  a rough  recon- 
ciliation of  the  divergent  interests  is  obtained  by  the  ordinary 
practice  of  making  the  lessee  pay — either  with  or  -wfithout 
a fixed  annual  payment — a certain  “royalty”;  that  is,  a sum 
proportioned  either  to  the  amount  of  material  extracted,  or — 
which  is  the  more  suitable  arrangement — to  the  price  obtained 
for  it. 

§ 4.  When  we  pass  from  agriculture  to  mining,  we  meet 
with  manifest  and  striking  cases  of  wealth  of  which  the  value 
is  due  not  to  labour — at  least  not  to  labour  spent  on  the  valuable 
thing  itself — but  merely  to  its  scarcity  and  its  utility  in  its 
unlaboured  condition ; since  the  land  containing  a rich  mine  rises 
to  a price  far  exceeding  that  of  agricultural  land,  as  soon  as  the 
existence  of  its  contents  is  known,  before  the  application  of  any 
part  of  the  labour  that  will  ultimately  be  needed  to  extract  them. 


CHAP.  VII 


RENT 


297 


A still  more  important  case  in  which  the  element  of  labour — 
applied  in  order  to  increase  utility — is  practically  absent  from 
the  determination  of  value  is  that  of  land  in  towns ; the  high 
rent  of  which  is  entirely  due  to  the  utility  attaching  to  such 
ground  from  its  situation, — either  for  purposes  of  business,  or 
for  social  communication  and  enjoyment.  And  the  share  of 
produce  obtained  by  the  owner  of  such  land  has  increased  in 
importance  as  towns  have  grown  in  size  and  density,  with 
the  development  of  industry  and  trade : indeed,  it  is  note- 
worthy that  Ricardo’s  conception  of  rent  as  increasing  inde- 
pendently of  any  outlay  on  the  part  of  the  landowner,  as 
society  advances  in  population  and  wealth,  is  much  more 
clearly  applicable  to  the  case  of  building  land  in  towns  than 
it  is  to  the  case  of  agricultural  land,  which  Ricardo  has  chiefly 
in  view. 

There  are  various  other  uses  of  land — including  the  per- 
manent results  of  labour  applied  to  land — by  which  a surplus 
yield  is  sometimes  obtained,  similar  to  that  of  which  agri- 
cultural rent  partly  consists  and  often  considerably  greater 
in  amount.  Thus  a railroad  favourably  situated  or  cheaply 
constructed  is,  no  less  than  a farm,  an  instrument  of  which 
land  in  its  pre-existing  condition  may  be  regarded  as  raw 
material ; by  means  of  which  the  commodity  of  conveyance 
between  certain  places  is  produced  and  sold  at  a price  that  may 
yield  its  oAvners  considerably  more  than  ordinary  interest  on 
the  cost  of  making  the  railway  (including  the  purchase-money 
of  the  land^) ; because  either  it  is  not  possible  owing  to  legal 
obstacles  or  otherwise  to  construct  an  equally  effective  instru- 
ment for  the  same  uses,  or  at  any  rate  such  a construction 
would  be  too  costly  to  be  profitable.  A similar  exemption  from 
the  ordinary  effects  of  competition  is  sometimes  enjoyed  by 
certain  other  portions  of  industrial  capital,  such  as  the  capital 
of  water  companies  and  gas  companies ; whose  dividends  are 
in  consequence  considerably  higher  than  current  interest  on  the 
original  outlay. 

Again,  there  are  other  results  of  labour,  not  connected  with 


^ Where — as  has  usually  been  the  case — the  land  has  been  bought  at  a price 
considerably  beyond  its  agricultural  value,  a corresponding  share  of  the  extra 
value  derived  from  its  use  for  purposes  of  conveyance  has,  of  course,  been 
handed  over  to  the  previous  owner. 


298 


POLITICAL  ECONOMY 


BOOK  II 


land,  which  yield  a surplus  somewhat  similar  in  kind.  This  is 
the  case,  for  instance,  with  the  immaterial  results  of  the  labour 
of  Invention,  protected  from  imitation  by  patents.  Even  when 
the  extra  profit  obtained  by  the  use  of  the  patent  does  not 
amount  to  more  than  a fair  interest  on  the  value  of  the  labour 
and  materials  expended  before  the  invention  was  perfected ; still, 
as  the  intellectual  result  when  once  achieved  does  not  require 
renewal,  such  extra  yield  is  in  any  particular  case  determined — 
like  the  return  to  capital  spent  once  for  all  on  land — without 
any  relation  to  the  value  of  the  inventor’s  labour.  And  if  it  is 
still  possible  for  persons  excluded  from  the  advantage  of  the 
patent  to  use  profitably  inferior  processes  of  production,  the 
extra  yield  obtainable  by  those  who  use  the  patent  \vill  be 
detennined  in  a manner  exactly  analogous  to  ordinaiy  agri- 
cultural rent. 

So,  again,  the  extra  profit  obtained  by  the  Goodwill  or 
Connexion,  which  gives  firms  of  long  standing  an  advantage 
in  the  competition  for  business,  is  often  very  analogous  to 
rent ; for  though  it  may  broadly  be  regarded  as  interest  on 
the  cost  in  labour  and  outlay  incurred  mthout  adequate  im- 
mediate return,  during  the  earlier  years  of  the  business;  still 
it  is  often  mainly  due  to  a favourable  concurrence  of  social 
conditions,  and  when  once  acquired  it  tends  to  maintain  itself 
by  the  mere  vis  inertiae  of  habit,  without  any  extra  exertion 
of  skill  or  energy  on  the  part  of  those  who  enjoy  the  advantage. 
In  many  cases,  however,  it  is  difficult  to  separate  the  extra 
yield  obtained  merely  by  such  established  connexion  from  that 
which  is  due  to  general  belief  in  the  excellence  of  the  com- 
modities furnished  by  the  firm  in  question ; and  so  far  as  this 
belief  is  really  founded  on  the  skilful  conduct  of  the  business, 
the  additional  income  obtained  by  it — whatever  may  be  its 
ultimate  analysis — will  be  more  natuKilly  discussed  under  the 
head  of  wages. 


CHAPTER  VIII. 


THE  REMUNERATION  OF  LABOUR. 

§ 1.  We  now  approach  the  part  of  our  subject  which, 
especially  in  recent  years,  has  both  excited  the  keenest  prac- 
tical interest  and  given  rise  to  the  most  perplexing  theoretical 
controversy — the  competitive^  determination  of  the  wages  of 
labour.  It  seems  to  me  most  convenient  to  follow  Mill  in 
separating  the  investigation  into  two  parts:  to  consider  first 
the  “causes  wdiich  determine  or  influence  the  wages  of  labour 
“ generally,  and  secondly  the  differences  that  exist  between  the 
“ wages  of  different  employments.” - 

In  the  first  chapter  of  this  book  I suggested  that  the  term 
Wages  might  conveniently  be  extended  so  as  to  include  the 
remuneration  of  all  kinds  of  labour,  and  I shall  presently  urge 
reasons  for  giving  this  more  extended  scope  to  the  first  of  the 
two  inquiries  above  distinguished.  But  since  Mill  and  other 
economists  generally  use  the  term  “ wages  ” in  this  discussion  to 
denote  the  remuneration  of  labour  hired  by  employers,  I have 
thought  it  best  to  adopt  this  meaning  in  the  critical  discussion 
which  will  occupy  the  first  part  of  this  chapter®. 

' The  reader  should  bear  in  mind  that  throughout  both  parts  of  this  investi- 
gation Competition  is  understood  to  exclude  Combination,  whether  of  employed 
labourers  or  employers.  In  a subsequent  chapter  (c.  x.)  I shall  consider  to 
what  extent  this  competitive  distribution  is  liable  to  be  abrogated  or  modified  in 
consequence  of  the  action  of  such  combinations  with  the  view  of  raising  or 
lowering  wages. 

- Political  Economy,  Book  ii.  c.  xi.  § 1. 

® In  the  chapter  (Book  ii.  c.  xi.)  in  which  Mill  treats  of  “the  causes 
“which  determine  or  influence  the  wages  of  labour  generally,”  he  expressly 
proceeds  “as  if  there  were  no  other  kind  of  labour  than  common  unskilled 
“labour,  of  the  average  degree  of  hardness  and  disagreeableness.”  But  I am 
not  sure  that  he  quite  realises  how  widely  this  hypothetical  procedure  diverges 


300 


POLITICAL  ECONOMY 


BOOK  II 


We  may  begin  this  discussion  by  noticing  one  way  of 
dealing  with  the  question  of  wages  which  very  naturally  and 
obviously  suggests  itself  to  the  mind  of  reflective  persons,  and 
is  therefore  liable  to  mix  itself  more  or  less  unconsciously  with 
any  other  theory  that  they  may  adopt,  unless  it  is  openly  and 
clearly  expressed  and  discussed.  I mean  the  view  in  which 
labourers  are  considered  as  productive  instruments  requiring  a 
certain  quantum  of  food,  clothing,  lodging,  &c.,  to  keep  them 
in  the  most  efficient  condition  from  birth  to  death ; and  this 
quantum,  whatever  it  may  be,  including  whatever  is  similarly 
required  to  maintain  the  wives  and  mothers  of  labourers,  is 
regarded  as  their  normal  share  of  the  social  produce.  It  is, 
however,  easy  to  shew  that  there  is  no  necessary  tendency  in  a 
system  of  free  competition  to  give  them  just  this  share  and  no 
more.  For  if  the  labourer  can  produce  more  wealth  than  he 
and  his  family  require  for  necessary  consumption,  he  may 
obviously,  being  a free  agent,  keep  and  enjoy  the  remainder; 
and  we  must  assume  that  he  will  do  this  if  he  can.  It  is  true 
that,  in  such  a country  as  England,  labourers  without  any 
capital  could  not  produce  enough  to  keep  themselves  alive; 
still,  as  capital  could  not  any  more  be  used  without  labourers,  if 
the  combination  of  the  two  produces  more  than  is  necessary  to 


from  the  actual  facts,  in  such  a country  as  England,  where,  in  1867,  Mr  Dudley 
Baxter  estimated  the  persons  engaged  in  “agriculture  and  unskilled  labour” 
as  little  more  than  a third  of  the  whole  class  of  manual  labourers  (2,843,000 
out  of  7,785,000),  and  their  net  annual  earnings  as  considerably  less  than 
a third  of  the  aggregate  earnings  of  manual  labourers  (£70,659,000  out  of 
£254,729,000).  At  any  rate  I think  that,  in  the  course  of  Mill’s  discussion,  the 
very  hypothetical  character  of  the  assumption  on  which  he  is  proceeding  rather 
drops  out  of  his  own  mind,  and  is  certainly  liable  to  drop  out  of  his  reader’s 
mind.  Thus  I observe  that,  when  he  passes  (in  chapter  xiv.)  to  treat  of  the 
differences  of  wages  in  different  emploj’ments,  he  speaks  of  his  previous  discus- 
sion as  having  been  concerned  with  the  “laws  which  govern  the  remuneration  of 
“ordinary  or  average  labour,”  without  any  notice  of  the  great  difference  between 
the  average  remuneration  of  labour  generally,  and  the  average  remuneration  of 
unskilled  labour.  I observe  too  that  in  the  corresponding  chapter  in  Fawcett’s 
Manual  (Book  ii.  c.  iv.),  the  doctrine  of  which  is  mainly  derived  from  Mill,  the 
treatment  of  the  “average  rate  of  w'ages”  makes  no  reference  to  Mill’s  expressly 
hypothetical  procedure,  but  refers  apparently  to  the  average  of  actual  wages. 
And  since  it  seems  best  to  deviate  as  little  as  possible  from  actual  facts  in  the 
assumptions  on  which  our  reasoning  proceeds,  I have  taken  “general  wages”  to 
mean  the  average  remuneration  of  all  the  hired  labour  that  is  actually  supphed 
in  a modern  civilised  community ; afterwards,  in  § 4,  extending  the  question 
to  include  all  remuneration  of  labour. 


CHAP.  VIII 


THE  REMUNERATION  OF  LABOUR 


301 


keep  the  labourers  in  efficient  condition, — while  also  furnishing 
what  is  necessary  to  induce  the  owners  of  wealth  to  keep  up 
capital,  to  the  extent  required  to  make  labour  thus  productive, 
— there  is  no  general  reason  why  the  labourer  should  not  by 
free  contract  secure  a share  of  this  extra  produce. 

Nor  can  it  even  be  maintained  that  at  any  rate  the  food, 
clothing,  &c.,  necessary  to  keep  the  labourer  in  the  most 
efficient  condition  will  give  us  a minimum  below  which  the 
self-interest  of  employers,  if  duly  enlightened,  will  not  suffer 
wages  to  fall.  This  would  no  doubt  be  true  if  the  present 
labourers  alone  were  concerned,  and  if  the  employer  could 
actually  feed,  clothe,  and  shelter  his  labourers  just  as  he 
feeds,  covers,  and  shelters  his  horses.  But  when  we  consider 
the  labourer  as  a free  and  independent  citizen,  and  also  as  the 
father  of  a family,  spending  at  his  own  discretion  a considerable 
portion  of  his  wages  in  rearing  a future  generation  of  labourers, 
the  case  is  altered.  Suppose  that  the  employer  knows  that  his 
labourer  is  under-fed,  and  that  half-a-crown  a week  spent  on 
nourishing  food  and  warm  clothing  would  result  in  more  than 
half-a-crown’s  worth  of  extra  value  in  the  produce  of  his  week’s 
labour.  It  does  not  follow  that  it  is  his  interest  to  give  him 
the  extra  half-crown:  for,  in  the  first  place,  the  labourer  may 
spend  a large  portion  of  it  in  alcoholic  liquors,  &c.,  which  will 
impair  rather  than  increase  his  efficiency;  and,  secondly,  he  may 
spend  a large  portion  of  it  in  providing  better  food  and  clothing 
for  his  family ; which,  though  it  may  be  amply  repaid  to  society 
in  the  additional  efficiency  of  the  future  labourers  whom  he  is 
rearing,  will  not  necessarily  afford  any  pecuniary  advantage  to 
the  employer  who  may  have  no  means  of  securing  to  himself 
any  of  the  value  of  this  future  efficiency. 

Hence  it  is  only  under  special  circumstances — i.e.,  if  the 
employer  has  adequate  empirical  grounds  for  believing  that  the 
higher  wages  will  actually  be  spent  in  increasing  the  efficiency/ 
of  labourers  whom  he  will  himself  employ; ' — that  his  self-interest 

' It  is  to  be  hoped  that  many  employers,  in  modern  civilised  societies,  . o Id 
incur  the  extra  expenditure  in  the  case  supposed,  even  if  the  chance  of  securing 
to  themselves  a remunerative  share  of  the  resulting  addition  to  the  wealth  of 
the  community  did  not  seem  quite  worth  purchasing  at  the  price,  on  strict 
calculations  of  probable  gain  and  loss.  But  I do  not  think  that  we  can  safely 
reason  on  the  assumption,  that  an  ordinary  employer  will  be  willing  £o 
mix  philanthropy  with  business  to  this  extent. 


302 


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BOOK  II 


alone  can  be  relied  on  to  secure  such  provision  for  the  labourer 
as  would  make  the  excess  of  his  produce  over  his  consumption 
a maximum. 

§ 2.  The  view  just  discussed  has  not,  so  far  as  I know, 
ever  been  adopted  by  professed  political  economists.  On  the 
contrary,  the  doctrine  which  in  1869  was  “presumed”  by  John 
Stuart  Mill  to  be  “ found  in  every  systematic  treatise  on 
“ Political  Economy  ” — and  which  remains  unretracted  and 
unmodified  in  the  latest  edition  of  his  own  treatise — is  that 
currently  known  as  the  Wages-Fund  Theory,  which  appears  to 
leave  the  efficiency  of  labour  altogether  out  of  account.  The 
theory  is  stated  by  Mill  in  an  essay,  in  which  its  inadequacy 
is  admitted,  as  follows. 

“ There  is  supposed  to  be,  at  any  given  instant,  a sum  of 
“ wealth,  which  is  unconditionally  devoted  to  the  payment  of 
“ wages  of  labour.  This  sum  is  not  regarded  as  unalterable,  for 
“ it  is  augmented  by  saving,  and  increases  with  the  progress  of 
“ wealth ; but  it  is  reasoned  upon  as  at  any  given  moment  a 
“ predetermined  amount.  More  than  that  amount  it  is  assumed 
“ that  the  wages-receiving  class  cannot  possibly  divide  among 
“ them ; that  amount,  and  no  less,  they  cannot  but  obtain.  So 
“ that,  the  sum  to  be  divided  being  fixed,  the  wages  of  each 
“depend  solely  on  the  divisor,  the  number  of  participants.”* 
General  wages  being  thus  determined,  the  detennination  of 
general  profits  is  similarly  simple : profits  in  the  aggi’egate  are 
simply  the  excess  of  what  the  productive  labourers  produce 
over  what  is  required  to  replace  their  wages.  In  this  way,  as 
was  before  remarked,  the  theory  of  Distribution  comes  to  be 
treated  by  Mill  and  his  followers  as  though  it  had  but  slight 
analogy  to  the  theory  of  the  Exchange  Value  of  products. 

The  discussion  in  the  preceding  chapters  will  already  have 
shewn  the  reader  that  I do  not  adopt  this  method  of  treatment. 
But  this  view  of  wages  has  been  so  widely  accepted,  and  by 
■writers  of  so  much  authority-,  that  it  seems  desirable  to  examine 
it  carefully. 

^ Mill,  Dissertations  and  Discussions,  w.  p.  43,  in  a review  of  Thornton,  On 
Labour. 

- As  I have  noticed,  Mill  himself  partially  renounced  this  theory  (in  the 
review  before  quoted).  His  leading  disciples,  however,  declined  to  follow  him 
in  this  renunciation.  See  Cairnes,  Some  Leading  Principles  of  Political  Economy, 
Part  II.  c.  i. ; and  compare  Fawcett,  Manual  of  Political  Economy,  Part  ii.  c.  iv. 


CHAP.  VIII 


THE  REMUNERATION  OF  LABOUR 


303 


I may  begin  by  observing  that  the  language  in  which  it  is  ex- 
pounded by  Mill  in  his  treatise  has  exposed  him  to  the  charge  of 
presenting  an  arithmetical  truism  as  an  economic  lawb  and,  in 
fact,  in  the  passage  (Book  ii.  c.  xi.  § 1)  in  which  he  first  speaks 
of  the  wages-fund  he  seems  rather  to  describe  the  elements  of 
which  the  whole  sum  paid  in  wages  is  composed,  than  to  state 
the  law  by  which  the  total  is  determined.  “ What  may  be 
“ called  the  wages-fund  of  a country,”  he  says,  “ is  made  up  of 
“that  part  of  the  circulating  capital”  of  the  country  “which  is 
“ expended  in  the  direct  purchase  of  labour,”  together  with  all 
other  funds  that  are  paid  in  exchange  of  labour.  But  obviously, 
if  we  knew  no  more  of  the  wages-fund  than  that  it  is  a total 
thus  heterogeneously  composed,  the  statement  that  “ the  general 
“ rate  of  wages  cannot  rise  but  by  an  increase  of  the  aggregate 
“ funds  employed  in  hiring  labourers  or  a diminution  in  the 
“ number  of  the  competitors  for  hire  ” would  be  as  unimportant 
as  it  is  undeniable ; it  would  be  merely  saying  that  a quotient 
can  only  be  made  larger  by  increasing  the  dividend  or  diminish- 
ing the  divisor.  What  Mill,  however,  really  meant  was  that, 
since  the  great  majority  of  the  wage-earning  class  are  labourers 
hired  by  employers  for  a profit,  the  amount  of  wealth  devoted 
to  the  payment  of  wages  is  mainly  determined  by  the  “ law  of 
“ increase  of  capital,”  that  is,  by  saving.  It  was  of  course  always 
recognised,  by  himself  and  his  followers,  that,  strictly  speaking, 
the  “capital”  of  which  the  increase  is  important  to  the  labourer 
is  “ only  circulating  capital  and  not  even  the  whole  of  that,  but 
“ the  part  which  is  expended  in  the  direct  purchase  of  labour.” 
Notwithstanding  this,  it  was  thought  a sufficient  approximation 
to  the  truth  to  say  “for  shortness”  that  “wages  depend  on  the 
“proportion  between  population  and  capital.”  Mill  certainly 
warns  his  readers  that  this  is  an  “ elliptical  not  a literal  state- 
“ment”:  but  it  is  stated  without  qualification  in  the  popular 
manual  of  his  distinguished  disciple  FawcetU^,  “ that  capital 
“is  the  fund  from  which  labour  is  remunerated ’’...that  “wages 
“ in  the  aggregate  depend  upon  the  ratio  between  capital  and 
“ population ’’...and  that  “every  law  concerning  wages  must  be 
“ deduced  from  the  fundamental  conception  of  a ratio  between 
“capital  and  population...  if  - the  number  of  the  labouring 

1 Cf.  Cairnes,  loc.  eit. 

^ Manual  of  Political  Economy,  Book  ii.  c.  iv. 


304 


POLITICAL  ECONOMY 


BOOK  II 


“ population  remain  stationary  wages  cannot  rise,  unless  capital 
“ is  increased.” 

Writers  who  use  such  language  as  I have  just  quoted  can 
hardly,  I think,  have  clearly  recognised  how  small  a proportion 
of  the  saved  wealth  in  any  year,  in  such  a country  as  England, 
takes  the  form  of  wages  of  hired  productive  labourers.  According 
to  Mr  Giffenh  the  “ capital  or  property  in  the  United  Kingdom” 
may  be  taken  to  have  increased,  between  1865  and  1875,  at  the 
average  rate  of  more  than  £200,000,000  a year ; while  according 
to  Professor  Levi’s  estimate, — which  seems  to  be  accepted  by 
Mr  Giffen^  who  is  generally  regarded  as  taking  an  optimistic 
view  of  the  recent  progress  of  the  working  classes  in  wealth, — 
the  average  annual  increment  in  the  aggregate  earnings  of  the 
working  classes  during  the  same  period  can  hardly  have 
amounted  to  one-fifteenth  of  this  sum^  Hence — making  all 
allowance  for  the  large  conjectural  element  that  ineUtably 
enters  into  these  statistical  calculations — it  is  clear  that  a mere 
knowledge  of  the  total  amount  of  capital  saved  wthin  any 
period  is  no  guide  at  all  to  the  increment  received  by  the 
wages-fund  within  the  same  period : everything  depends  on 
determining  the  proportion  in  which  savings  tend  to  be  dmded 
between  wages  and  other  capital.  This  point  is  discussed  by 
Cairnes,  in  his  development  of  Mill’s  doctrine^  His  view  is 
that  the  proportion  borne  to  labour  by  that  part  of  industrial 
capital  that  is  not  wages  is  determined  solely  by  the  nature  of 
the  national  industries,  so  that,  assuming  labour  to  remain 
stationary  and  the  condition  of  the  arts  of  industry  to  be 

1 Essay  vii.  in  his  Essays  in  Finance  (First  Series),  p.  177.  I ought  to 
mention  that  Mr  Giffen’s  estimate  includes  foreign  investments. 

2 See  Essays  in  Finance  (Second  Series),  Essay  si.  p.  433:  and  Prof.  Levi’s 
Wages  and  Earnings  of  the  Working  Classes  (1885),  p.  4. 

^ Prof.  Levi  estimates  the  increase  at  103  millions  for  the  whole  period  from 
1867  to  1884  : but,  as  Mr  Giffen  remarks,  there  was  probably  httle  increase 
in  money  wages  between  1873  and  1884. 

■*  Some  Leading  Principles,  Part  ii.  c.  i.  § 8.  Cairnes  afterwards  recognises 
{loc.  cit.  § 9)  that  the  “industrial  development  of  a progressive  community  follows 
“a  well-defined  course,”  according  to  which  “ a constant  growth  of  the  national 
“capital  is  accompanied  with  a nearly  equally  constant  decline  in  the  pro- 
“ portion  of  this  capital  which  goes  to  support  labour.”  But  he  treats  this 
change  as  “the  inevitable  consequence  of  the  progress  of  the  industrial  arts”; 
he  does  not  anywhere  recognise  that  the  mere  increase  of  capital  through 
saving  must  have  a certain  tendency  to  produce  tlris  result,  independently  of 
any  change  in  the  arts  of  industry. 


CHAP.  VIII 


THE  REMUNERATION  OF  LABOUR 


305 


unchanged,  the  amount  of  industrial  capital  that  is  not  wages 
must  also  be  unchanged : from  which  it  follows  that,  on  the 
same  assumptions,  if  the  industrial  capital  invested  in  England 
in  any  year  were  increased  by  100  millions,  the  whole  100 
millions  Would  be  added  to  the  wages-fund,  and  profits  and 
interest — according  to  Cairnes’s  argument’ — would  be  corre- 
spondingly reduced. 

This  consequence  is,  I think,  sufficiently  paradoxical  to 
point  us  to  the  error  in  the  premisses  from  which  it  follows. 
It  is  unwarrantable  to  assume,  as  Cairnes  implicitly  does,  that 
the  industrial  demand  for  capital  other  than  wages  will  not  be 
extended  by  a fall  in  the  price  paid  for  the  commodity  demanded. 
Both  general  analogy  and  specific  experience  would  lead  us, 
I think,  to  the  contrary  assumption  that,  given  the  extent 
of  the  industrial  demand  for  capital,  the  amount  that  may 
be  profitably  employed  in  aid  of  labour  will  not  be  a fixed 
quantity;  but  will  tend  to  be  greater  or  less  as  the  rate  of 
interest  falls  or  rises^.  It  follows  that,  if  we  suppose  an 
increase  to  take  place  in  the  proportion  of  total  capital  to 
number  of  labourers,  other  things  remaining  unchanged,  in 
consequence  of  which  the  rate  of  wages  begins  to  rise  and 
the  rate  of  interest  to  fall,  we  must  also  suppose,  as  a 
concomitant  effect,  an  increase  in  the  proportion  of  “ not-wages” 
or  “ auxiliary  ” capital  to  labour.  And  again,  from  this  increase 
in  the  aid  rendered  by  capital  to  labour,  we  must  further  infer 
an  increase  in  the  average  productiveness  of  labour,  and  there- 
fore in  the  annual  produce.  Hence  the  increase  in  the  wages- 
fund  that  accompanies  the  increase  in  the  “not-wages”  capital 
will  not  be  taken  entirely,  nor  perhaps  even  chiefly,  out  of  the 
shares  of  other  members  of  the  community.  Nay,  further, 
when  we  are  considering  the  matter  from  a purely  abstract 
point  of  view,  and  not  in  relation  to  the  special  circumstances 
of  a crowded  country  like  England,  we  must  not  exclude  the 
possibility  that  new  investments  may  tend  on  the  average  to 
enlarge  the  field  of  profitable  employment  for  capital  in  some 

* Cairnes  does  not  suggest  that  the  personal  efficiency  of  the  labourers  will 
be  increased  by  the  extra  wages.  Nor  is  there  any  ground  for  supposing  that 
this  would  generally  be  the  case  to  an  extent  sufficient  to  yield  anything  like 
100  millions'  worth  of  extra  produce. 

^ This  assumption  was  accordingly  made  in  treating  of  interest  in  c.  vi. 

p.  276. 


S.  P.  E. 


20 


306 


POLITICAL  ECONOMY 


BOOK,  n 


ways  as  much  as  they  contract  it  in  others ; so  that,  in  fact,  the 
increase  of  capital  may  increase  the  efficiency  of  labour  in  as 
great  a degree  as  it  increases  the  wages-fund;  and  thus  not 
cause  any  permanent  fall  in  the  rate  of  interest*.  But,  again,  if 
any  change  in  the  arts  should  increase  the  demand  for  auxiliary 
capital,  it  is  possible — as  Mill  himself  elsewhere  points  out^ — 
that  the  amount  spent  by  capitalists  in  wages  may  even 
diminish  temporarily,  while  the  total  capital  of  the  community 
increases ; in  consequence  of  an  extensive  “ conversion  of  circu- 
“ lating  into  fixed  capital.” 

If  this  reasoning  be  sound,  it  is  manifest  that  we  cannot 
regard  the  rate  of  wages  as  determined  merely  by  taking  the 
“ ratio  between  capital  and  population  ” ; since  this  alojie  helps 
us  but  little  towards  ascertaining  the  ratio  between  wages-fund 
and  population. 

§ 3.  So  far  I have  endeavoured  to  shew  the  inadequacy 
of  the  “ wages-fund  theory,”  without  expressly  rejecting  the 
common  view,  according  to  which  a portion  of  the  capital  of 
employers  is  conceived,  while  remaining  capital,  to  take  the 
form  of  wages  of  productive  labour.  But  this  view  seems  to 
me  confused  and  erroneous.  In  a certain  sense,  no  doubt, 
wages  are  normally  paid  out  of  capital ; but  not  in  any 
other  sense  than  that  in  which  interest  and  rent  are  paid  out 
of  capital.  A certain  portion  of  capital  is  always — to  use 
Bagehot’s  terms — “ remuneratory”  and  not  directly^  auxiliary 
in  its  nature ; that  is,  it  does  not  consist  of  instruments 
that  make  labour  more  efficient,  but  of  finished  products, 
destined  for  the  consumption  of  labourers  and  others.  This 
part  of  capital  continually  becomes  real  wages  (as  well  as  real 
profits,  interest,  and  rent)  being  purchased  bj"  the  labourer  with 
the  money  wages  he  receives  from  time  to  time.  But  it  is  not 
therefore  correct  to  regard  the  real  wages  as  employer’s  capital 
“ advanced  ” to  the  labourer.  The  transaction  between  the  two 
IS  essentially  a purchase  by  the  employer  of  the  result  of  a 

1 In  this  case  the  limit  for  each  employer  of  the  amount  of  capital  employed 
■would  be  determined  not  by  decrease  in  prospective  profit,  but  by  increase 
in  disadvantages  of  borro'wing. 

* Book  1.  c.  vi.  § 2. 

^ I have  before  explained  in  what  sense  and  to  what  extent  stocks  of  finished 
goods  may  be  brought  under  the  general  conception  of  auxiliary  capital.  See 
Book  I.  c.  T.  § 6. 


CHAP.  VIII 


THE  REMUNERATION  OF  LABOUR 


307 


week’s  labour,  which  thereby  becomes  a part  of  the  employer’s 
capital ; and  he  may  he  conceived — if  we  omit  for  simplicity’s 
sake  the  medium  of  exchange — to  give  the  labourer  in  return 
some  of  the  finished  product  of  his  industry.  When  this 
transaction  is  complete  a portion  of  the  capital  of  the  country 
has  undergone  one  of  the  transformations  through  which 
capital  is  continually  passing;  and  exists  now  in  the  form  of 
the  results  of  a week’s  labour,  having  previously  existed  in  the 
form  of  finished  but  unsold  products,  namely,  the  food,  fuel,  &c. 
that  pass  into  the  consumption  of  the  labourers;  while  by 
the  same  transaction  the  labourer  has  obtained  a share  of  the 
produce  of  industry  in  return  for  his  labour.  This  seems  to 
be  the  only  clear  and  consistent  view  that  can  be  taken  of  the 
payment  of  wages,  according  to  the  line  before  drawn  between 
“ capital  ” and  “ produce  ” : which  line,  again,  appeared  to  be 
the  only  one  by  which  we  could  make  precise  the  meaning 
commonly  attached  to  the  two  terms.  Economists  who  have 
not  adopted  this  view  are  liable  to  fluctuate  confusingly 
between  two  unreconciled  conceptions  of  wages ; at  one  time 
speaking  of  them  as  “paid  out  of  capital,”  whilst  at  another 
time  cnlliiig  them  the  labourers’  “share  of  the  annual  produce 
“ of  labour  and  capital,”  and  implying  in  this  and  other  phrases 
that  “ capital  ” and  “ produce  ” are  two  distinct  portions  of 
wealth.  This  confusion  seems  to  be  best  avoided  by  considering 
the  utilities  that  result  from  hired  productive  labour — whether 
“ embodied  ” in  ploughed  land,  mown  hay,  half-finished  manu- 
factures, or  any  other  form — as  constituting  the  real  capital  of 
the  employer  who  purchases  them ; and  the  commodities  that 
continually  pass  into  the  consumption  of  the  labourers  as  their 
share  of  the  produce. 

“ Remuneratory  capital,”  in  short,  does  not  remunerate  while 
it  remains  capital — at  least  while  it  remains  the  capital  of  the 
employ crb  We  have,  therefore,  no  reason  to  regard  each  addition 
to  the  total  stock  of  capital  in  the  country  as  necessarily  con- 
taining an  addition  to  the  wages-fund ; but  only  as  tending  to 
increase  wages  indirectly  so  far  as  it  (1)  increases  aggregate 
produce  by  supplying  industry  with  additional  instruments,  and 
(2)  increases  the  labourers’  share  of  produce,  in  consequence  of 

* It  may  of  course  become  capital — ^especially  “consumers’  capital” — in  the 
labourers’  possession. 


20—2 


308 


POLITICAL  ECONOMY 


BOOK  II 


the  lower  rate  of  interest  obtained  on  the  increased  supply 
of  capital'. 

The  adoption  of  the  other  view  proceeds  partly — like  so 
many  other  economic  errors — from  a one-sided  attention  to  the 
more  obvious  and  striking  results  of  investing  capital.  It  is 
of  course  true  that  when  a new  investment  of  capital  is  made, 
a large  portion  of  the  money  employed  is  generally  paid  in 
wages  to  labourers ; and  the  inference  is  natural,  that  if  it  were 
not  for  this  investment,  the  labourers  in  question  would  not 
be  receiving  wages  during  the  period  in  which  the  process 
of  investment  is  going  on.  But  the  inference  is  mistaken ; 
for  we  must  assume,  speaking  broadly  and  generally,  that  the 
labourers,  if  not  employed  in  this  way,  would  be  earning  a share 
of  the  produce — though  a somewhat  smaller  share — in  some 
other  work.  It  is  possible  indeed  that  some  of  them  would  have 
been  idle ; and  no  doubt  the  sudden  cessation  or  depression  of 
any  particular  branch  of  industiy  would  throw  many  labourers 
out  of  work ; so  that,  under  certain  circumstances,  the  with- 
drawal of  a given  amount  of  capital  might  conceivably  involve  a 
diminution  in  the  real  wages  of  the  employed  not  much  less  in 
extent.  But  this  result  is  very  exceptional : and,  so  far  as  it 
occurs,  the  loss  thus  caused  to  the  labourers  should  be  regarded 
as  a transient  result  of  the  disorganisation  of  industry,  not 
as  a permanent  consequence  of  the  diminution  in  the  amount  of 
capital.  Speaking  generally,  there  is  no  reason  for  supposing 
that  a larger  percentage  of  labourers  will,  on  the  average,  be 
unemployed  in  a community  with  small  capital  than  in  one  with 
large ; only  in  the  former  their  labour  will  tend  to  be  ceteris 
paribus  less  productive,  and  their  command  over  the  necessaries 
and  conveniences  of  life  will  generally  be  less  in  consequence-. 

' It  should  be  observed  that  these  results  will  only  follow  if  the  increase 
of  capital  is  in  excess  of  any  increased  field  for  its  emplo3'ment. 

“ Again,  it  is  of  course  true  that  if  wages  rise  the  capitalist  employers  have 
to  spend  a larger  sum  in  purchasing  the  results  of  a given  amount  of  labour ; 
but  then  since  these  results  have,  by  supposition,  risen  in  market  value,  their 
capital  (estimated  at  its  market  value)  is  correspondingly  increased.  That  thus 
the  capitalists’  wealth  is  not  decreased,  while  the  labourers’  is  increased,  by  a 
simple  exchange  of  equivalents,  is  certainly  a paradoxical  result;  but  I have 
already  noticed  that  this  paradox  is  an  inevitable  consequence  of  measuring 
producers’  and  consumers’  wealth  together  by  a common  standard.  In  fact  the 
capitalists’  increase  of  nominal  wealth  is  greater  than  has  just  been  indicated; 
since  they  will  obtain  an  equal  rise  in  value  on  all  similar  results  of  labour 


CHAP.  VIII 


THE  REMUNERATION  OF  LABOUR 


309 


The  view  that  the  amount  of  wages  received  by  hired 
labourers  is  completely  determined  by  the  saving  of  capitalists 
and  the  number  of  such  labourers  has,  however,  another  source : 
it  partly  arises  from  a hasty  application  of  the  elementary  truth 
that  the  labourer  must  be  supported  on  the  produce  of  previous 
labour.  It  is  incontrovertible  that  the  ploughman  in  December 
cannot  be  fed  on  the  corn  to  be  reaped  next  harvest : but  it  does 
not,  therefore,  follow  that  the  share  of  last  year’s  corn  which  falls 
to  ploughmen  or  labourers  generally  is  strictly  limited.  The 
commodities  consumed  by  hired  labourers — or  even  by  manual 
labourers — are  not  divided  by  a sharp  line  from  those  consumed 
by  other  classes : hence  any  cause  tending  to  increase  the  reward 
of  labour  generally  at  the  expense  of  interest  or  rent — or  the 
remuneration  of  manual  labourers  at  the  expense  partly  of  other 
labourers — would  not  be  prevented  from  having  some  effect  at 
once  by  the  fact  that  the  existing  stocks  of  finished  goods  are 
adapted  for  a different  distribution  of  produce  : though  probably 
a part  of  its  effect  would  be  temporarily  absorbed  in  causing  a 
rise  in  the  market-value  of  the  commodities  which  such  labourers 
chiefly  consume. 

§ 4.  How  then  is  the  amount  of  the  produce  that  falls  to 
labour  competitively  determined,  if  a mere  consideration  of 
the  numerical  ratio  between  amount  of  capital  and  number 
of  labourers  does  not  help  us  to  determine  it  ? In  answering 
this  question  it  seems  to  me  best  to  include  in  the  notion  of 
the  labour  to  be  remunerated  the  exertions,  intellectual  and 
muscular,  of  the  employer  no  less  than  those  of  his  employees. 
The  chief  reason  why  this  course  is  not  commonly  adopted  by 
English  economists  seems  to  be  that  the  remuneration  of  the 
employer’s  exertions,  so  far  as  he  employs  his  own  capital, 
is  actually  received  by  him  mixed  up  with  the  returns  to  his 
capital,  and  can  only  be  artificially  distinguished  from  it  by 
economic  analysis ; so  that  this  composite  employer’s  share  is 
in  ordinary  thought  obviously  contrasted  with  the  share  of  the 

which  they  have  previously  purchased,  so  far  as  their  value  depends  on  the  cost 
of  reproduction.  No  doubt,  if  the  labour  grown  dearer  is  not  really  more 
efficient,  their  nominally  increased  capital  may  not  bring  them  in  any  more 
income.  But  this  result  will  not  surprise  us  when  we  reflect  that,  if  the  labour 
grown  dearer  is  not  more  productive,  the  rise  in  wages  must  involve  a fall  in 
interest;  and  it  is  implied  in  the  very  notion  of  a fall  in  interest  that  a larger 
amount  of  capital  is  required  to  bring  in  a given  income. 


310 


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employed,  as  tending  to  rise  when  the  latter  falls  and  vice  versa. 
And  certainly  it  cannot  be  denied  that  the  interests  of  em- 
ployers are  so  far  opposed  to  those  of  their  employees,  that  an 
increase  due  to  certain  causes  in  the  share  of  either  class  tends 
to  be  accompanied  by  a decrease  in  the  share  of  the  other.  But 
this  in  no  way  places  the  former  class  in  an  exceptional  position ; 
since  similar  oppositions  are  continually  liable  to  occur  between 
the  pecuniary  interests  of  different  groups  of  hired  workers,  em- 
ployed in  the  production  of  competing  commodities.  And  there 
is  a class  of  hired  workers, — managers  of  joint-stock  companies, 
or  even  of  private  industrial  establishments, — who  do  almost 
exactly  the  same  kind  of  work  as  many  capitalist  employers; 
and  if,  as  is  very  likely,  such  a manager  has  capital  invested 
somewhere  else,  he  is  practically  induced  to  remain  a manager, 
instead  of  setting  up  on  his  own  account,  by  the  consideration 
that  he  will  be  better  remunerated  for  his  labour  in  the  former 
position  than  in  the  latter. 

It  may  be  urged,  however,  that  the  ascertainment  of  the 
amount  of  an  aggregate,  in  which  we  lump  together  the  earnings 
of  employers  and  employed,  will  not  really  answer  any  question 
of  practical  interest ; for  what  both  labourers  and  emploj-^ers  are 
concerned  to  know  is  the  amount  of  remuneration  that  the  two 
classes  respectively  may  look  for,  not  the  amount  of  produce 
that  is  somehow  to  be  divided  among  them.  But  similarly  any 
particular  labourer  is  only  concerned  with  the  average  wages  of 
the  whole  aggregate  of  hired  labourers  in  a ver}'  indirect  way ; 
so  far,  that  is,  as  changes  in  this  average  rate  may  be  expected 
to  extend  their  effects  to  the  particular  branch  of  industry-  to 
which  he  belongs.  And  in  the  same  way  he  is  indirectly' 
concerned,  in  only  a slightly  additional  degree  of  remoteness, 
with  the  remuneration  of  the  aggregate  labour  of  the  society  of 
which  he  is  a member.  And  there  is  no  adequate  reason  for 
making  a separate  aggregate  of  the  wages  of  hired  labourers : 
since — if  we  suppose  free  competition  excluding  combination — 
the  remuneration  of  labourers  paid  by  employers,  so  that  the 
results  of  their  labour  become  a portion  of  the  employer’s  capital, 
is  not  determined  in  a manner  essentially  different  from  the 
remuneration  of  labourers  who  work  on  their  own  account  and 
are  directly  paid  by  consumers : except  that  in  the  latter  case 
the  worker  is  commonly'  paid  later  and,  therefore,  his  remunera- 


CHAP,  vni 


THE  REMUNEEATION  OF  LABOUR 


311 


tion  must  ceteris  paribus  be  increased  by  interest  proportioned 
to  the  interval  that  he  has  to  wait  for  payments 

The  chief  advantage  of  considering  first  the  reward  of  all 
labour  taken  in  the  aggregate  is  that  it  brings  into  prominence 
an  element  in  the  wages-problem  which  the  discussion  of 
particular  wages  is  apt  to  leave  in  the  background.  When  we 
are  considering  variations  in  the  wages  of  this  or  that  group  of 
labourers  we  commonly  assume,  as  it  is  convenient  to  do,  that 
the  real  contribution  of  these  labourers  to  the  whole  produce  of 
the  community  is  given,  and  that  what  we  are  concerned  to 
investigate  is  merely  the  variation  in  the  amount  of  the 
equivalent  that  society  is  willing  to  give  them  for  this  con- 
tribution. But  when  we  are  considering  the  reward  of  labour 
in  the  aggregate,  it  is  obvious  that  it  tends  to  be  increased, 
ceteris  paribus,  by  any  cause  that  tends  to  make  labour  more 
efficient.  Labour  in  the  aggregate  gets  what  it  produces, 
after  subtracting  the  price  that  it  has  to  pay  for  the  use  of  the 
results  of  previous  labour,  and  whatever  has  to  be  paid  for  the 
use  of  land,  or  other  portions  of  man’s  material  environment, 
beyond  ordinary  interest  on  what  it  would  have  cost — in  the 
present  state  of  the  arts  of  industry — to  bring  such  portions  of 
matter  from  their  original  condition  to  then  present  degree  of 
adaptation  to  human  uses.  Consequently  in  the  determination 
of  interest  and  rent,  as  expounded  in  the  two  previous 
chapters,  we  have  by  implication  indicated  how  the  remunera- 
tion of  labour  in  the  aggregate  is  determined;  so  far  as  the 

1 This  will  perhaps  become  clearer  if  we  consider  a simple  hypothetical  case. 
Let  us  suppose  that  a group  of  carpenters,  working  each  on  his  own  acccunt 
and  receiving  payment  from  customers,  agree  to  throw  their  private  stocks  of 
materials,  instruments,  and  half-finished  goods  into  a common  stock,  under  one 
management.  Let  us  assume  for  simplicity  that  the  manager  is  just  worth  his 
wages : i.e.,  that  whatever  he  gets  as  salary  is  balanced  by  the  saving  he  effects 
through  better  organisation  of  labour  and  purchase  of  materials  on  a larger 
scale.  Then,  other  things  remaining  the  same,  the  other  carpenters  will 
obviously  earn  precisely  what  they  earned  before.  Let  us  now  further  suppose 
that  this  aggregated  capital  becomes  the  property  of  the  manager : he  will  of 
course  claim  to  receive  interest  on  it  (including  insurance  against  risk)  and  the 
incomes  of  the  other  carpenters  will  be  proportionately  diminished : but  there  is 
no  reason  why  the  part  of  their  earnings  which  was  strictly  remuneration  of 
labour  should  not  remain  the  same  as  before.  It  is  clear,  therefore,  that  the 
mere  transfer  of  a number  of  independent  workers  to  the  class  of  hired  labourers 
will  not  necessarily  produce  any  effect  on  the  aggregate  remuneration  of  manual 
labourers. 


312 


POLITICAL  ECONOMY 


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quantity  and  quality  of  the  labour  is  assumed  to  be  given 
independently  of  its  remuneration. 

Accordingly,  while  I hold,  with  English  economists  generally, 
that — in  such  a country  as  England — this  remuneration  tends, 
other  things  being  equal,  to  bear  a smaller  proportion  to  the 
total  number  of  labourers  as  that  number  increases,  I should 
yet  state  the  reason  for  this  conclusion  quite  differently  from 
those  who  adopt  the  “ wages-fund  ” doctrine,  and  who  determine 
wages  simply  by  the  arithmetical  ratio  between  capital  and 
population.  In  my  view  this  result  is  due  to  the  fact  that  an 
increase  in  the  number  of  labourers  will  tend  to  raise  the 
industrial  demand  for  the  aid  of  capital,  and  therefore  to 
increase  the  portion  of  the  total  produce  paid  for  the  use  of  a 
given  amount  of  capital ; at  the  same  time  the  proportion  of 
total  produce  to  the  number  of  labourers  will  tend  to  be  less, 
as  the  decreased  utility  of  the  additional  labour,  in  a thickly 
populated  country,  is  not  likely  to  be  compensated  by  the  gain 
in  efficiency  from  the  increased  advantages  of  co-operation' ; 
while,  again,  the  owners  of  land,  and  any  other  employers  whose 
capital  is  partially  exempted  from  competition,  are  likely  to 
absorb  a considerable  share  of  this  latter  gain.  On  this  latter 
ground,  again,  even  if  capital  increases  pari  passu  with  labour, 
the  reward  of  labour  will  tend  to  decrease  in  such  a country  as 
England,  as  its  quantity  increases ; unless  some  improvement 
takes  place — through  invention,  education,  or  otherwise — in 
the  average  productiveness  of  the  capital-aided  labour.  On  the 
other  hand,  any  such  improvement  is  on  the  whole  likely  to 
increase  the  labourers’  share  of  the  produce ; though  it  should 
be  observed  that  different  kinds  of  improvement  operate  in 
very  different  modes  and  degrees  to  bring  about  this  result. 

^ the  first  place,  improvements  in  the  physical,  moral,  or 
ectual  qualities  of  labourers  tend  to  increase  the  share  of 
"oduce  that  falls  to  labour,  leaving  the  share  of  capital 
■red ; except  so  far  as  they  also  increase  the  advantage 
' industry  derives  from  the  use  of  capital,  by  rendering 
1 1 '•  bourer  more  adapted  for  processes  in  which  much  capital 
is  used.  So  far  as  this  latter  result  accompanies  the  increase  in 

1 On  account  of  tbis  loss  through  crowding  it  is  of  course  possible  that 
interest  may  not  actually  rise  even  though  the  average  remuneration  of  labour 
falls. 


CHAP.  VIII 


THE  REMUNERATION  OF  LABOUR 


313 


the  labourer’s  personal  eflficiency,  a certain  share  of  the  increased 
produce  will  fall  to  the  owner  of  capital  as  such.  Similarly, 
labour  in  the  aggregate  tends  to  gain  by  all  inventions  that 
economise  the  labour  necessary  to  produce  a given  utility, — 
whether  they  are  discoveries  of  new  processes  in  industry  or  new 
lines  of  trade, — if  they  do  not  involve  the  use  of  an  increased 
amount  of  capital ; though  the  immediate  result  of  such  in- 
ventions is  likely  to  be  detrimental  to  some  labourers  by 
rendering  their  acquired  skill  less  useful,  and — possibly — by 
lowering  the  price  of  certain  products  more  than  can  be  made 
up  by  the  consequent  extension  of  the  demand  for  them. 
Hitherto,  however,  the  great  majority  of  inventions  have  created 
a demand  for  additional  capital ; and  in  this  case  it  is  conceiv- 
able that,  owing  to  the  consequent  rise  in  the  rate  of  interest, 
the  owners  of  capital  generally  may  obtain  an  addition  to  their 
share  exceeding  the  whole  extra  produce  due  to  the  invention. 
In  this  way  we  reach  the  conclusion  that  the  introductic  ;■  f 
machinery,  though  profitable  to  the  community  taken  as  a wV 
may  conceivably,  in  a state  of  free  competition,  be  temper 
injurious  to  the  interests  of  all  members  of  the  community 
are  not  o^vners  of  capital.  This  conclusion,  however,  has 
practical  application ; most  important  inventions,  while 
creasing  the  field  of  employment  for  capital,  have  at  the  same 
time  effected  a saving  of  expense  to  the  community  much 
greater  than  the  addition  they  have  caused  to  the  capitalists’ 
share  of  the  produce.  Still  the  essential  difference,  from  the 
labourer’s  point  of  view,  between  inventions  that  merely  econo- 
mise labour  without  requiring  extra  capital,  and  those  that 
enlarge  the  field  of  employment  for  capital,  should  be  carefully 
noted. 

§ 5.  So  far  we  have  supposed  the  quantity  and  quality  of 
labour  to  be  given  independently  of  its  remuneration : but  it  is 
necessary,  in  order  to  complete  our  view  of  the  causes  determin- 
ing the  remuneration  of  labour  generally,  to  take  into  account 
the  extent  to  which  the  supply  of  labour  is  itself  affected  by  its 
remuneration,  and  examine  the  reaction  on  the  price  of  labour 
of  this  influence  exercised  by  price  on  supply.  For  clearness 
we  will,  at  first,  confine  our  attention  to  the  influence  exercised 
on  the  number  of  labourers ; supposing  for  the  present  that  the 
quantity  of  labour  supplied  by  each  labourer,  and  its  quality, 


314 


POLITICAL  ECONOMY 


BOOK  II 


remain  unchanged.  As  we  have  before  observ'ed,  the  quantity 
of  labour  in  a community  may  vary  independently  of  any 
variations  in  the  aggregate  of  its  population,  from  changes  in 
the  proportion  of  workers  to  non- workers.  Such  changes  actually 
occur  to  an  extent  not  unimportant,  and  are  often  at  least  partly 
due  to  variations  in  wages : but  I do  not  think  that  we  can  say 
generally  that  a rise  or  fg  1 in  the  price  of  labour  has  a definite 
uniform  tendency  to  increase  or  diminish  the  number  of  workers 
supplied  by  a fixed  quantity  of  population.  We  wll  accordingly 
confine  our  consideration  primarily  to  the  influence  of  high  or 
low  wages  on  the  increase  or  decrease  of  population  in  the 
aggregate ; only  taking  note  of  the  effect  on  the  proportion  of 
workers  to  non-workers,  so  far  as  this  is  insepaiable  from  the 
effect  on  aggregate  population. 

We  may  begin  by  noticing  an  important  case  in  which  the 
action  of  price  on  supply  may  be  neglected  without  material 
error  in  investigating  the  determination  of  wages — the  case, 
namely,  of  a thinly-peopled  peaceful  country,  cultivated,  as  a 
new  colony  is,  by  methods  belonging  to  the  most  advanced 
stage  of  industiy.  Here  no  considerable  number  of  persons  are 
prevented  from  marrying  by  lowness  of  wages;  and,  there- 
fore, so  far  as  native  labour  is  concerned,  supply  may  pro- 
perly be  treated  as  independent  of  price.  Still  even  in  such 
a country  the  total  supply  of  labour  will  actually  depend  to 
some  extent  on  immigration;  and  this  will  be  affected  by  the 
rate  of  wages — though  probably  not  bo  an  extent  sufficient  to 
react  materially  on  the  rate  itself.  But  in  a thickly-peopled 
country — according  to  the  view  of  the  laws  of  population 
taken  in  Book  l.* — we  must  regard  the  lowness  of  the  real 
reward  of  labour  as  a continually  active  check  to  the  increase 
of  population ; the  force  of  which  is  no  doubt  diminished,  but 
not  actually  removed,  by  emigration  to  other  countries  where 
the  wages  of  labour  are  higher. 

The  check,  as  we  have  already  seen,  is  actually  applied  in 
several  very  different  ways ; thus  in  England,  among  the  upper 
classes  of  labourers,  it  takes  almost  solely  the  form  of  abstinence 
— prudent  or  vicious — from  matrimony;  while  lower  do%vn  in 
the  social  scale  the  “preventive”  check  is  probably  less  operative 
than  the  “ positive  ” : i.e.,  the  restriction  of  number  results 

* See  c.  vi.  § 3. 


CHAP.  VIII 


THE  KEIVIUNERATION  OF  LABOUR 


315 


partly  from  the  shortening  of  the  lives  of  adults  through 
unhealthy  occupations  or  diseases  caused  or  aggravated  by  an 
insufficient  supply  of  necessaries,  but  chiefly  from  the  mortality 
among  young  children  in  consequence  either  of  insufficient 
provision  of  necessaries,  or  of  the  absence  of  due  maternal  care 
in  case  the  mother  of  the  family  has  to  earn  wages  for  its 
support.  In  other  countries,  again,  the  reduction  is  believed  to  be 
largely  effected  by  voluntary  limitation  of  the  number  of  children 
in  a family.  However,  in  one  way  or  another,  it  may  be  laid 
down  that  an  effective  check  is  exercised  on  the  great  majority 
of  labourers  in  all  European  countries  by  the  actual  lowness  of 
the  remuneration  of  labour : and  under  such  circumstances  it  is 
evident  that,  if  the  earnings  of  labour  generally  rise,  the  force  of 
the  check  will  tend  to  be  diminished,  and  a stimulus  given  to 
population  of  which  the  ultimate  tendency  will  be  to  lower  the 
remuneration  of  labour  again.  Similarly,  any  fall  in  this  re- 
muneration tends,  by  making  the  check  more  stringent  and  so 
reducing  population,  to  cause  a compensatory  rise  hereafter. 
In  either  case,  too,  the  temporary  variation  in  the  reward  of 
labour,  being  partly  absorbed  by  a change  in  the  number  of 
non-workers  requiring  to  be  supported  by  the  workers,  is  pre- 
vented from  affecting  proportionally  the  style  of  living  of  any 
class h And  if  we  could  take  as  approximately  constant  the 
average  standard  of  household  expenditure  in  each  of  the  higher 
grades  of  labourers,— the  amount  of  income  on  which  persons  of 
average  prudence  would  think  themselves  justified  in  marrying, 
— then  so  long  as  population  was  effectively  checked  by  want  of 
means,  this  habitual  standard  would  give  us  a normal  rate  of 
remuneration  in  each  class  round  which  the  actual  remunera- 
tion would  slowly  oscillate,  just  as  the  market-value  of  a ma- 
terial product  oscillates  about  its  cost  of  production.  In  fact  we 
might  regard  this  habitual  standard  as,  so  to  say,  a “ Quasi-cost 
“of  Production”  of  labour;  being  as  closely  analogous  to  the 
cost  of  production  of  a material  product  as  is  compatible  with 
the  labourer’s  freedom  of  choice. 

But  this  supposition  is  only  useful  to  facilitate  our  general 
conception  of  the  mutual  influence  of  supply  and  remuneration 

* The  causes  that  tend  to  maintain  different  grades  of  labourers  with 
different  standards  of  comfort,  even  in  a society  where  competition  is  unre- 
stricted, will  be  discussed  in  the  following  chapter. 


316 


POLITICAL  ECONOMY 


BOOK  II 


of  labour:  since  there  is,  in  fact,  no  such  rigid  fixity  in  the 
standards  of  living  customary  in  different  social  grades.  If  in 
the  ordinary  remuneration  of  any  class  of  labourers,  whose  real 
remuneration  enables  them  to  consume  comsiderably  more  than 
the  mere  necessaries  of  life,  a fall  takes  place  from  which  they 
cannot  be  relieved  to  any  material  extent  by  industrial  com- 
petition, we  can  hardly  doubt  that  it  will  partly  have  the  effect 
of  lowering  the  standard  of  living ; and  similarly  a temporarv^ 
rise  in  the  market  price  of  such  labour  will  have  a certain 
tendency  to  raise  along  with  it  the  “ quasi-cost  of  production  ” 
of  the  labour  in  question.  Hence  we  cannot  say  that  the 
“ standards  of  comfort  ” of  such  classes  tend  to  give  us  a definite 
normal  rate  of  remuneration  in  each  class ; but  merely  that  they 
tend  to  some  extent  to  counteract  the  causes  operating,  at  any 
given  time  and  place,  to  alter  the  amount  of  produce  competi- 
tively allotted  to  labour. 

The  Ricardian  conception,  however,  of  a “natural”  rate  of 
wages,  to  which  the  actual  rate  tends  to  return  after  any  casual 
fluctuations,  is  more  plausible  as  applied  to  any  class  of  labourers 
whose  numbers  are  mainly  kept  down  by  the  difficulty  of  pro- 
curing for  their  households,  in  sufficient  quantity  and  quality, 
such  necessaries  as  food,  clothing,  fuel,  and  house-room ; since  it 
would  seem  that  any  reduction  in  the  wages  of  such  a class 
must  tend  to  cause  a decline  in  their  numbers  from  insufficient 
nutrition  ; and,  correspondingly,  that  a rise  in  the  wages  of  such 
labourers  would  have  a stronger  tendency  than  it  would  in  the 
case  of  any  other  class  to  cause  a subsequent  increase  in  the 
supply  of  labourers  and  so  cetei'is  paribus  to  depress  wages 
again.  And  I certainly  think  that  the  Ricardian  doctrine 
would  hold  good  in  this  case,  if  the  effect  of  private  alms- 
giving and  public  poor-relief  could  be  left  out  of  account,  and 
if  we  could  assume  that  the  class  in  question  had  substantially 
to  keep  up  its  own  numbers.  But  I doubt  its  applicability  to 
■ conditions  determining  the  lowest  rate  of  remuneration  of 
Iji  'ur  in  England  at  the  present  time.  For  (1)  the  worst-paid 
labour  of  all  is  that  of  classes  in  large  to\iTis  which  are  partly 
kept  up  by  the  economic  degradation  of  members  of  other 
classes ; and  (2)  the  actual  effect  of  almsgi^dng  and  public 
poor-relief  in  preventing  absolute  starvation  renders  it  un- 
certain whether  the  lowest  rate  of  wages  that  could  be  even 


CHAP.  VIII 


THE  REMUNERATION  OF  LABOUR 


317 


transiently  borne — without  producing  an  irresistible  demand 
for  extraordinary  aid  from  public  funds — would  have  a material 
tendency  to  reduce  the  numbers  of  the  class  receiving  it ; since 
such  a class,  living  from  hand  to  mouth  with  little  hope  of 
material  improvement  of  its  condition  and  yet  no  shai'p  dread 
of  actual  starvation,  is  apt  to  be  peculiarly  reckless  in  indulging 
its  inclinations  to  marriage  and  propagation  of  the  sjjecies. 

And  further,  we  have  to  take  account  of  an  element  hitherto 
omitted,  which  is  here  of  special  importance ; namely,  the  effect 
of  variations  in  the  labourers’  remuneration  on  their  personal 
productiveness,  whether  exhibited  in  increase  of  quantity  of 
work  per  head,  or  improvement  of  quality.  It  is  evident 
this  kind  of  effect  tends  to  react  upon  the  remuneratic 
labour  in  the  opposite  way  to  that  just  discussed:  since 
increase  in  the  number  of  labourers  caused  by  increase  in  tueir 
average  remuneration  tends,  so  far  as  it  operates,  to  bring  down 
this  average  remuneration  towards  the  level  from  which  it 
rose ; whereas  so  far  as  increased  remuneration  causes  increased 
personal  productiveness',  the  remuneration  tends  to  remain 
above  the  former  level.  For  so  far  as  a labourer’s  productive- 
ness increases  in  proportion  to  his  consumption,  his  share  of 
produce  may  obviously  be  augmented,  without  any  diminution 
in  the  incomes  of  other  members  of  the  community.  And 
hence  we  have  to  note  an  important  qualification  of  the  general 
tendency  of  a fall  in  interest  to  be  followed  by  a more  or  less 
compensatory  rise,  which  from  our  present  point  of  view  may  be 
described  as  the  tendency  of  a rise  in  the  aggregate  remunera- 
tion of  labour  to  be  followed  by  a more  or  less  compensatory 
fall ; for  evidently,  so  far  as  increased  remuneration  causes 
increased  personal  efficiency,  a transient  fall  in  interest  may  be 
partly  made  up  through  the  share  that  capital  has  in  the 
advantages  of  the  increased  efficiency.  And  similarly  any 
depression  tends  in  some  degree  to  counteract  the  restorative 
eft’ect  on  average  wages  that  a diminution  in  the  number  of 
labourers  would  ceteris  paribus  tend  to  cause,  in  such  a country 
as  England. 

' So  far  as  this  increase  of  productiveness  takes  the  form  of  increase  in  the 
length  of  time  for  which  each  labourer  works,  we  must  of  course  understand  by 
“increase  of  remuneration’’  increase  in  the  labourer’s  earnings,  not  in  the  price 
of  labour  measured  in  time. 


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The  extent  to  which  changes  in  the  remuneration  of  labour 
will  produce  changes — in  the  same  direction — in  its  productive- 
ness will  of  course  be  very  different  in  the  case  of  different 
kinds  of  labour  and  different  physical  and  moral  conditions  and 
social  surroundings  of  the  labourers.  Nor  can  we  even  say  that 
in  all  cases  there  will  be  some  resultant  effect  of  this  kind,  even 
if  we  confine  our  attention  to  the  manual  labourers  who  are 
recipients  of  “ wages  ” in  the  ordinary  sense ; since  though  an 
increase  of  such  wages  might  almost  always  be  spent  in  in- 
creasing the  productive  power  of  present  or  future  labourers,  it 
also  enables  the  habitual  standard  of  living  to  be  maintained 
with  less  energetic  work,  and  often  tempts  to  unsalutary  indul- 
gences*. But  in  the  case  of  labourers  scantily  provided  Avith 
the  means  of  maintaining  physical  health  and  vigour,  and 
suffering  from  unsatisfied  desire  in  consequence,  it  is  reasonable 
to  suppose  that  a material  rise  in  wages  would  have  important 
effects  in  improving  the  productive  powers  of  present  and  future 
labourers ; and  this  improvement  would,  so  far  as  it  went, 
counteract  the  tendency  of  increased  population  to  bring  dovTi 
wages  again.  And  we  can  still  less  doubt  that  a fall  in  wages 
which  brought  labourers  into  this  condition  would  have  a 
dangerous  tendency  to  maintain  itself,  through  the  consequent 
fall  in  efficiency. 

' The  diverse  effects  of  increased  remuneration  on  the  labourers’  efficiency 
are  well  illustrated  by  the  following  passages  from  Lord  Brassey’s  'Work  and 
Wages,  c.  iii. 

“At  the  commencement  of  the  construction  of  the  North  Devon  Railway,  the 
“wages  of  the  labourers  were  2s.  a day.  During  the  progress  of  the  work  their 
“wages  were  raised  to  2s.  6<i.  and  3s.  a day.  Nevertheless,  it  was  found  that  the 
“work  was  executed  more  cheaply  when  the  men  were  earning  the  higher  rate  of 
“wage  than  when  they  were  paid  at  the  lower  rate.  Again  in  London,  in  carrying 
“out  a part  of  the  Metropolitan  Drainage  Works  in  Oxford  Street,  the  wsiges  of 
“the  bricklayers  were  gradually  raised  from  6s.  to  10s.  a day;  yet  it  was  found 
“that  the  brickwork  was  constructed  at  a cheaper  rate  per  cubic  yard,  after  the 
“wages  of  the  workmen  had  been  raised  to  10s.,  than  when  they  were  paid  at  the 
“rate  of  6s.  a day.” 

“On  the  railways  of  India  it  has  been  found  that  the  great  increase  of  pay 
“which  has  taken  place  has  neither  augmented  the  rapidity  of  execution,  nor 
“added  to  the  comfort  of  the  labourer.  The  Hindoo  workman  knows  no  other 
“want  than  his  daily  portion  of  rice,  and  the  torrid  climate  renders  watertight 
“habitations  and  ample  clothing  alike  unnecessary.  The  labourer,  therefore, 
“desists  from  work  as  soon  as  he  has  provided  for  the  necessities  of  the  day. 
“Higher  pay  adds  nothing  to  his  comforts ; it  serves  but  to  diminish  liis  ordinary 
“industry.” 


CHAPTER  IX. 


PARTICULAR  WAGES  AND  PROFITS. 

§ 1.  In  examining  how  the  remuneration  of  labour  taken 
in  the  aggregate  tends  to  be  determined,  we  have  been  in- 
evitably led  to  take  note  of  the  differences  which  normally 
subsist,  even  where  competition  is  legally  quite  open,  between 
the  wages  ^ of  different  branches  of  industry.  As  has  already 
been  observed,  it  is  this  latter  question  which  is  most  interesting 
to  any  particular  labourer : the  variations  in  an  average  found 
by  dividing  the  aggregate  of  workers’  remuneration  among  the 
aggregate  of  workers  do  not  practically  concern  him,  except  so 
far  as  he  may  infer  from  them  the  variations  in  the  wages  that 
he  may  himself  expect.  It  might  be  added  that  even  the 
average  rate  of  earnings  in  his  own  industry  only  concerns 
him  indirectly,  unless  he  is  conscious  of  being  an  average 
worker.  There  is  hai’dly  any  branch  of  industry  in  which  a 
labourer  stronger,  more  industrious,  more  skilful,  or  more 
careful  than  his  fellows  is  not  likely  in  one  way  or  another  to 
obtain  more  than  the  average  rate  of  remuneration.  The 
limits,  however,  within  which  such  variations  in  the  earnings  of 
individuals  are  confined  vary  very  much  in  different  industries : 
they  are  naturally  greater  where  work  is  paid  for  by  the  job  or 
piece,  than  where  the  payment  is  customarily  made  for  a day  of 
customary  length ; and  they  tend  to  increase  as  labour  becomes 

1 In  accordance  with  the  usage  of  our  leading  economists,  I extend  the  term 
wages,  when  used  generally  in  this  discussion,  to  include  the  remuneration  of 
the  labour  of  trades  and  professional  men  ; but  I have  avoided  any  particular 
application  of  it  which  seemed  odd  or  likely  to  mislead. 


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more  skilled,  except  so  far  as  this  tendency  is  checked  by 
custom  or  counteracted  by  combination. 

When  the  superior  labourer  works  on  his  own  account,  the 
additional  remuneration  that  he  will  obtain  will  correspond  partly 
to  the  greater  quantity  of  work  that  he  is  enabled  to  do  by 
the  more  urgent  demand  for  his  services,  partly  to  the  superior 
quality  of  his  work  so  far  as  this  is  generally  recognised.  Similar 
considerations  determine  the  extra  wages  that  an  employed 
labourer  will  receive ; only  that  in  most  cases  general  recog- 
nition of  the  superiority  in  quality  of  work  is  more  difficult  to 
obtain : there  is  commonly  a difference  between  the  real  value 
of  a superior  labourer  to  his  actual  employer  and  his  market 
value  as  estimated  by  employers  generally,  which  difference  is 
the  natural  remuneration  of  the  superior  insight  of  the  employer 
who  secures  the  superior  employee. 

In  the  first  instance,  however,  we  will  confine  our  attention 
to  the  case  of  the  worker  of  average  ability  and  industry, 
WHO  cannot  reasonably  expect  more  than  the  average  rate  of 
remuneration  in  his  department  of  work*.  It  may  be  thought 
perhaps  that  what  such  an  average  worker  may  reasonably 
expect,  under  a system  of  free  competition,  may  be  stated  still 
more  generally  as  the  average  net  advantages*  obtained  by 
average  labourers  generally  within  the  region  over  which  the 
competition  is  effective ; that,  in  the  words  of  Adam  Smith, 
“ the  whole  of  the  advantages  and  disadvantages  of  the  different 
“ employments  of  labour  and  stock  must  in  the  same  neighboiir- 
“ hood  be  either  perfectly  equal  or  continually  tending  to 
“ equality... at  least  in  a society  where  things  were  left  to  follow 
“their  natural  course.”  For  “if  in  the  same  neighbourhood 
“ there  was  any  employment  evidently  either  more  or  less 
“ advantageous  than  the  rest,  so  many  people  would  crowd  into 
“ it  in  the  one  case,  and  so  many  would  desert  it  in  the  other, 
“ that  its  advantages  would  soon  return  to  the  level  of  other 
“ employments.” 

And,  in  fact,  in  Adam  Smith’s  careful  analysis  of  inequalities 
of  wages  “ arising  from  the  nature  of  the  employments  them- 

1 I use  this  term — taken  from  the  Economics  of  Industry — to  denote  what 
Adam  Smith  calls  “ the  whole  of  the  advantages  and  disadvantages  ” of  the 
dilferent  employments  of  labour:  which  is  a somewhat  loose  phrase  to  express 
the  “balance  of  advantages  after  compensating  for  extra  disadvantages.” 


CHAP.  IX 


PARTICULAR  WAGES  AND  PROFITS 


321 


“selves,”  independently  of  “the  policy  of  Europe,”  there  is  no 
express  recognition  of  any  differences  inconsistent  with  this 
general  statement*.  Nor  can  it  reasonably  he  doubted  that 
industrial  competition  has,  within  certain  limits,  the  equalising 
tendency  attributed  to  it  by  Adam  Smith ; or  that,  in  the 
absence  of  the  counteracting  forces  of  Custom  and  Combination, 
this  tendency  would  be  more  strikingly  manifested  than  it  has 
yet  been  in  any  European  community.  But  the  further  discus- 
sion which  Mill  and  others  have  given  to  this  point  has  brought 
into  view  important  inequalities  in  the  real  reward  of  certain 
kinds  of  labour,  which  are  in  no  respect  compensatory  for  in- 
equalities in  the  sacrifices  entailed,  and  which  yet  the  develop- 
ment of  competition  has  no  necessary  tendency  to  remove, 
except  in  a very  indirect  and  remote  way. 

The  importance  of  this  consideration  we  have  already  had 
occasion  to  notice^.  But  as  the  nature  and  conditions  of  these 
inequalities  have  hardly  obtained  sufficient  recognition  from  the 
followers  of  Adam  Smith  generally,  I propose  to  devote  fuller 
attention  to  them  in  this  chapter:  confining  myself  for  the 
present  to  the  causes  which  would  still  operate,  even  under  a 
system  of  complete  “ natural  liberty,”  provided  that  the  existing 
inequality  in  the  distribution  among  human  beings  of  wealth, 
and  of  marketable  natural  qualities,  moral  and  intellectual, 
were  not  materially  changed  by  some  cause  other  than  free 
competition. 

First,  however,  it  is  to  be  observed  that,  as  has  already  b* 
noticed  in  discussing  Joint  Products®,  what  industrial  compc 
tition  directly  tends  to  equalise — with  the  qualifications  to  be 
presently  stated — is  not  exactly  the  price  of  equal  quantities 
of  labour,  but  the  whole  remuneration  of  labourers  of  equal 
skill  and  energy.  Hence  it  may  fail  to  raise  the  price  of 
a particular  kind  of  labour,  if  all  the  labour  of  this  kind 
required  to  satisfy  the  demand  of  society — even  at  a price 

1 When,  however,  we  look  at  the  details  of  his  analysis,  we  observe  that 
Adam  Smith  does  distinguish  one  case  in  which  this  tendency  to  equality  clearly 
does  not  operate:  that  is,  where  “trust”  is  required.  As  Mill  justly  remarks, 
the  superiority  of  reward  in  this  case  is  not  in  any  way  compensatory  for  special 
sacrifices:  trustworthiness  has  an  extra  value  due  to  what  I call  “scarcity,” 
and  Mill  “natural  monopoly.” 

2 See  c.  ii.  § 8. 

® See  e.  ii.  § 10. 


S.  P.  E. 


21 


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below  that  of  ordinary  labour  of  the  same  quality — can  be 
sufficiently  supplied  from  the  spare  time  of  energetic  persons 
regularly  employed  in  some  other  way:  as  is  the  case  with 
certain  kinds  of  literary  work.  Secondly,  we  may  note  that,  in 
the  passage  above  quoted  from  Adam  Smith,  this  equalising 
tendency  is  only  supposed  to  take  effect,  so  far  as  the  advantages 
and  drawbacks  of  different  employments  are  (1)  “evident”  and 
(2)  “within  the  same  neighbourhood.”  The  first  limitation 
requires  to  be  emphasised,  though  it  may  seem  obvious ; since 
in  practical  applications  of  economic  reasoning,  based  on  the 
assumption  of  industrial  competition,  it  is  not  always  borne  in 
mind  that  inequalities  of  remuneration  only  tend  to  be  removed 
so  far  as  they  are  “ evident  ” to  the  class  of  persons  detrimen- 
tally affected  by  them.  Such  “evidence”  is  more  likely  to  exist 
where  the  unequally  remunerated  employments  are  “in  the 
“ same  neighbourhood  ” : but  a large  amount  of  knowledge  about 
the  wages  of  labour  in  remote  places  is  now  ever}"where 
attainable  in  civilised  communities ; and  is  actually  attained  to 
a considerable  extent, — which,  however,  varies  a good  deal 
according  to  the  different  intellectual  development  of  the  classes 
affected.  So  far  as  this  knowledge  exists,  industrial  competition 
will  tend  to  remove  any  appreciable  differences  in  the  real 
remuneration  of  labour  of  the  same  quantity  and  quality'  in 
different  localities,  that  are  more  than  sufficient  to  compensate 
for  the  expense  and  other  losses  and  sacrifices  involved  in 
migration  from  one  locality  to  another, — supposing  that  the 
expense  is  not  actually  beyond  the  means  of  the  persons  affected. 
The  obstacles  presented  by  such  expenses  and  sacrifices  vaiy 
indefinitely  at  different  times  and  between  different  places; 
but  we  may  say  generally  that  the  range  within  which  their 
effect  is  comparatively  slight  tends  to  become  continually  larger 
as  civilisation  progresses. 

Thirdly,  however,  it  must  be  borne  in  mind  that,  even  \vithin 


1 In  comparing  qualities  of  labour  it  should  be  borne  in  mind  that  the 
processes  of  (nominally)  the  same  industry  are  somewhat  different  in  different 
places ; so  that  labourers  cannot  migrate  between  such  places  without  a certain 
loss  of  acquired  skill.  Again,  if  the  labourers  in  any  district  have  a low  average 
standard  of  physical  efficiency  in  consequence  of  their  low  wages,  then,  however 
easy  migration  may  be  to  a neighbouring  district  where  both  the  wages  and  the 
efficiency  are  greater,  the  diflBculty  an  immigrant  would  have  in  earning  the 
higher  wages  would  be  a serious  obstacle  to  equalisation. 


CHAP.  IX 


PARTICULAR  WAGES  AND  PROFITS 


323 


such  a limited  range,  the  equalising  tendency  of  Industrial 
Competition  can  only  take  effect  gradually;  and,  to  a large 
extent,  through  the  influence  exercised  by  changes  in  wages  on 
prospective  rather  than  on  present  labourers.  At  any  given  time 
and  place  the  competitive  price  of  the  services  rendered  by 
labourers  depends  on  the  relation  of  the  supply  to  the  demand 
just  as  the  price  of  any  finished  product  of  labour  does.  There 
is  thus  no  reason,  so  far  as  industrial  competition  goes,  why  a 
sudden  fall  in  the  demand  for  any  particular  kind  of  skilled 
labour  should  not  reduce  its  remuneration  to  the  level  of  that  of 
altogether  unskilled  labour : or  even  below  the  average  of  this 
latter  so  far  as  the  skilled  labourer’s  previous  habits  of  work 
have  unfitted  him  for  unskilled  labour.  Nor,  indeed,  is  there 
any  economic  reason  why  an  extensive  change  in  processes,  or 
local  displacement,  of  any  particular  industry  might  not  reduce 
the  remuneration  of  any  kind  of  labour  in  a particular  district 
even  below  the  point  sufficient  to  furnish  the  labourers  with 
necessaries  of  life;  as  they  might  be  too  numerous  to  be 
absorbed  by  such  migration  as  their  resources  enabled  them  to 
effect*. 

§ 2.  Let  us  now  proceed  to  explain  and  classify  the  in- 
equalities in  particular  wages,  which  industrial  competition 
does  not  directly  tend  to  remove,  even  within  the  limited  range 
and  in  the  gradual  manner  just  described. 

First,  we  may  place  such  differences  as  are  apparent  r-’^'be’' 
than  real : such  as  the  higher  rate  of  wages  in  some  em 
ments,  due  to  “inconstancy  of  employment”  and  “uncert.  • ; 

“ of  success.”  In  this  case  even  the  average  money  wages  or 
average  workmen  during  long  periods  may  not  be  higher  in  such 
employments  than  they  are  in  others  with  which  we  compare 
them ; and  it  is,  of  course,  only  such  an  average  that  competition 
tends  to  equalise.  In  other  cases,  an  inequality  in  money 
wages  merely  balances  some  opposite  inequality  in  advantages 
not  purchased  by  money,  or  compensates  some  extra  sacrifice. 
For  it  must  be  borne  in  mind  that  the  “net  advantages” 
obtainable  by  labour,  which  industrial  competition  tends 
to  equalise,  have  to  be  taken  to  include  not  merely  com- 
modities actually  unpurchased — such  as  the  free  grazing  and 

* Some  further  discussion  of  these  local  and  temporary  variations  in  wages 
and  their  courses  will  be  found  in  a subsequent  chapter  (c.  xi.). 


21—2 


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free  cottage-site  that  an  English  agricultural  labourer  often 
enjoyed  a century  ago — but  all  appreciable  utilities  whatever, 
whether  generally  purchasable  or  not,  which  any  particular  kind 
of  work  affords  special  opportunities  for  obtaining.  Thus,  for 
instance, — as  Adam  Smith  notices, — the  fact  that  any  calling 
stands  higher  in  social  repute  than  another  will  tend  ceter'is 
paribus  to  attach  to  it  a lower  average  income.  Similarly  we 
must  include  on  the  negative  side  of  the  account  not  only 
sacrifices  that  indirectly  involve  pecuniary  loss — as  when  a 
certain  kind  of  work  tends  from  its  unhealthiness  to  shorten 
the  average  working  period  of  life — but  all  drawbacks  and 
sacrifices  whatever.  It  should  be  observed,  however,  that  there 
is  no  tendency  to  compensate  special  disadvantages  felt  by  par- 
ticular labourers  owing  to  special  social  circumstances  or  physi- 
cal constitution,  if  equally  competent  labourers  who  do  not  feel 
these  disadvantages  could  be  readily  obtained  in  their  stead. 
Nor,  again,  are  the  extra  sacrifices,  which  thus  tend  to  be  com- 
pensated, exactly  the  average  extra  sacrifices  made  by  the  whole 
body  of  labourers  in  any  given  employment ; but  rather  the 
extra  sacrifices  made  by  that  section  of  the  body  in  which  the 
strongest  aversion  is  felt  to  the  employment,  provided  that  there 
is  a demand  for  their  services  at  the  price  required  to  overcome 
this  aversion,  and  that  such  persons  are  equally  fitted  for  other 
employments  to  which  they  are  less  averse,  and  are  not  com- 
pensated by  any  advantages  similarly  peculiar  to  them.  It 
would  be  quite  possible  that  some  members  of  the  class  might 
have  no  dislike  at  all  to  their  work, — or  might  even  derive  much 
positive  pleasure  from  it ; still,  their  self-interest  would  prompt 
them  to  demand  the  highest  price  obtainable  for  their  serrices ; 
and  competition  would  enable  them  to  obtain  as  much  remune- 
ration as  was  found  necessary  to  compensate  the  sacrifices  of 
their  fellows.  Similarly  the  snecial  advantages  attaching  to 
any  kind  of  work  have  no  tendency  to  lower  its  remuneration, 
if  they  are  only  felt  to  be  advantages  by  a number  of  persons  so 
limited  as  to  be  unable  to  supply  more  than  a fraction  of  the 
whole  labour  that  society  is  ^villing  to  purchase  at  the  higher 
rate  which,  independently  of  these  advantages,  it  would  tend  to 
command. 

Secondly,  no  exception  is  constituted  to  the  general  rule  of 
equality  of  net  advantages  in  different  emplojunents  by  any 


CHAP.  IX 


PARTICULAK  WAGES  AND  PROFITS 


325 


diflPerences  in  wages,  which  merely  compensate  for  differences  in 
the  cost  of  time  and  money,  entailed  by  the  previous  training 
which  skilled  labour  requires.  If  wealth  were  equally  dis- 
tributed and  competition  perfectly  free,  this  cause  would  still 
operate  to  raise  the  net  advantages  earned  by  a given  amount 
of  skilled  work  above  those  of  an  equal  amount  of  unskilled 
work : though  the  general  correspondence  of  remuneration  to 
sacrifice  would  still  be  maintained.  Under  such  circumstances, 
supposing  the  rate  of  interest  given,  we  could  determine  exactly 
the  normal  differences  of  wages  due  to  this  cause  in  any  given 
case : it  would  be  sufficient,  if  continued  for  the  average  working 
period  of  life  of  such  a skilled  worker,  to  replace  with  interest  the 
wealth  expended  in  teaching  the  worker  and  maintaining  him 
during  the  extra  years  of  his  education — subtracting,  of  course, 
whatever  was  earned  by  the  pupil  before  his  education  was 
completed.  In  short,  the  sum  so  expended  would  tend  to  yield, 
precisely  in  the  same  way  and  to  the  same  extent  as  any  other 
capital,  a return  proportioned  to  the  amount  and  the  period  of 
investment.  And  there  can  be  no  doubt  that  a considerable 
part  of  the  higher  wages  of  skilled  artisans  and  professional 
men  in  England  is  actually  to  be  referred  to  this  cause ; and 
to  be  regarded  as  a replacement  with  interest  of  the  “ personal 
“capital”  which  they  possess  in  their  expensively  acquired  skill. 

But  thirdly,  in  a society  in  which  wealth  is  distrib  ' as 
unequally  as  it  is  in  our  own,  it  is  likely — quite  apart  fi  - . 
influence  of  combination  or  governmental  interference  .hat 
certain  kinds  of  skilled  labour  will  normally  be  purchased  at 
an  extra  price  considerably  above  that  required  to  replace,  with 
interest  at  the  ordinary  rate,  the  expense  of  acquiring  the  skill ; 
through  the  scarcity  of  persons  able  and  willing  to  spend  the 
requisite  amount  of  money  in  training  their  children  and  sup- 
porting them  while  they  are  being  trained. 

In  explaining  how  precisely  this  scarcity  is  maintained,  we  are 
met  with  a question  to  which  political  economists  generally  have 
given  rather  vague  answers : namely,  what  general  assumption 
may  legitimately  be  made  as  to  the  limits  of  parents’  willingness 
to  sacrifice  their  own  present  comforts  and  satisfactions  to  the 
future  well-being  of  their  children.  Probably  it  will  corre- 
spond fairly  to  the  facts  as  they  exist  in  England  at  the  present 
time  if  we  assume  that  average  parents  in  all  classes  are  ^viF  ng 


326 


POLITICAL  ECONOMY 


BOOK  II 


to  make  considerable  sacrifices  in  order  to  give  their  children 
the  training  required  to  enable  them  to  remain  in  the  same  grade 
of  society  as  the  parents  themselves : but  are  not  usually  willing 
to  make  the  greater  sacrifices  required  to  raise  them  above  their 
own  class.  If  so,  it  is  easy  to  understand  how  the  labour  of  any 
grade  above  the  lowest  should  be  maintained  at  a scarcity  value. 
But  even  if  parents  generally  in  the  lower  grades  of  labour  were 
desirous  of  doing  their  utmost  to  give  their  children  a better 
education,  it  might  easily  be  out  of  their  power  to  do  this — 
consistently  with  the  maintenance  of  their  own  industrial  effi- 
ciency and  the  health  of  their  families — except  by  borrowing; 
from  which  resource  they  would  ordinarily  be  cut  off  by  their 
inability  to  give  adequate  security  for  repayment.  For  the 
parent,  even  if  he  had  confidence  that  his  child  would  be  able 
and  willing  to  repay  out  of  his  future  wages  the  capital  bor- 
rowed, is  rarely  likely  to  find  a lender  who  will  share  this 
confidence. 

Tn  this  way  we  are  led  to  the  conclusion  that  inequalities 

he  distribution  of  produce  so  considerable  as  those  which 
- [;  in  our  own  society  have  a certain  tendency  to  maintain 

themselves  which  is  quite  independent  of  the  mere  vis  inertiae 
of  custom.  Such  a society  is  likely  to  organise  itself  in  grades 
or  strata  distinguished  by  differences  of  income ; and  so  far 
separated  that — though  individuals  are  continually  ascending 
and  descending — the  transition  is  yet  not  sufficiently  easy 
to  prevent  the  labour  of  any  superior  grade  from  being  kept 
at  what  is  essentially  a scarcity  value. 

These  higher  rates  will  of  course  be  liable  to  continual 
fluctuations  from  changes  in  the  relation  of  the  supply  of  the 
labour  of  each  grade  to  the  field  of  emploiunent  for  it ; and — 
in  such  a country  as  England — the  limitation  of  supply  necessary 
to  maintain  the  higher  wages  of  any  grade  requires  generally 
speaking  an  effective  restriction  on  the  natural  increase  of 
population  within  the  grade,  as  well  as  an  effective  barrier 
against  intrusion  from  below.  But  such  a restriction  tends  to 
result,  in  a general  way — as  we  have  had  occasion  to  note — fi'om 
the  habitual  standards  of  comfort  prevalent  in  the  respective 
grades ; though,  as  was  pointed  out,  the  resistance  offered  b}’ 
any  such  Habitual  standard  to  changes  in  wages  is  by  no  means 
rigid. 


CHAP.  IX 


PAETICULAR  WAGES  AND  PROFITS 


327 


It  has  further  to  be  observed  that  many  classes  of  skilled 
workers  not  ordinarily  regarded  as  capitalists  use  more  or  less 
expensive  instruments  and  materials ; which  adds,  of  course,  to 
the  total  amount  of  capital  which  their  labour  requires  ^ A 
further  quantum  of  capital,  in  a different  shape,  is  employed 
by  artisans  of  the  classes  of  shoemakers,  tailors,  the  species 
of  carpenters  called  cabinet-makers,  and  others,  so  far  as  they 
produce  goods  for  sale  on  their  own  account.  Such  persons  are 
in  fact  small  traders  as  well  as  manufacturers ; and  their  earn- 
ings, like  those  of  other  small  traders,  partake  of  the  nature  of 
profits  in  a varying  degree,  proportioned  to  the  amount  of 
capital  that  they  use. 

It  is  not  improbable  that  the  average  profits  made  by  such 
artisan  shopkeepers,  or  by  retail  traders  generally,  may  be  suflfir 
cient,  after  paying  ordinary  interest  on  the  capital  employed, 
to  afford  an  extra  rate^  of  remuneration  for  the  services  of 
these  classes,  as  compared  with  the  lower  grade  of  skilled 
labourers  who  work  for  hire.  But  it  is  not  easy  to  say  how 
far  this  is  actually  the  case,  at  any  particular  time  and  place. 
For,  as  I have  before  observed,  the  average  returns  to  employers 
of  capital  in  any  branch  of  industry  are  much  harder  to  ascer- 
tain even  approximately  than  the  average  remuneration  of  any 
class  of  hired  labourers.  Numbers  of  small  tradesmen  are  con- 
tinually passing  through  the  bankruptcy  court ; others,  again, 
are  continually  extending  their  business  and  becoming  large 
tradesmen;  while  the  majority  appear  to  struggle  on  with 

1 I may  remind  the  reader  that  the  line  between  outlay  for  production  and 
outlay  for  consumption  cannot  always  be  sharply  drawn  ; and  that  in  some 
cases  a portion  of  the  expenditure  ordinarily  paid  out  of  income  must  be  partly 
reckoned  under  the  former  head — e.g.,  the  expense  of  a physician’s  carriage,  or  of  a 
literary  man’s  books.  In  other  cases,  again,  instruments  which  would  ordinarily 
be  reckoned  as  producers’  capital  are  partly  also  used  unproductively — e.g., 
farmers’  horses. 

® I avoid  speaking  of  this  as  a scarcity  rate,  since  it  might  be  somewhat 
misleading  to  suggest  that  any  extra  remuneration  of  retail  traders,  as  compared 
with  labourers  not  possessed  of  capital,  should  be  referred  to  the  “ scarcity  ” of 
such  traders — although  in  a certain  sense  it  would  be  true.  For — as  I shall  have 
occasion  to  urge  hereafter,  when  considering  the  deficiencies  of  laissez  faire  as  a 
means  to  the  most  economic  production — industrial  competition,  in  such  a case 
as  this,  has  no  sufficient  tendency  to  reduce  the  number  of  competitors  down  to 
the  limits  that  economy  requires ; its  effect  is  too  often  merely  to  divide  the 
Aggregate  employment  and  earnings  of  the  class  among  a larger  number  of 
individuals. 


328 


POLITICAL  ECONOMY 


BOOK  n 


considerable  fluctuations  of  income,  avoiding  complete  failure 
but  not  adding  importantly  to  their  capital.  We  have  no  such 
statistics  as  would  enable  us  to  estimate  the  average  earnings  of 
this  class  of  workers.  Even  if  we  had  them  it  would  still  be 
doubtful  whether  an  average  obtained  by  dividing  the  total 
amount  of  profits  earned  by  the  number  of  persons  employed  in 
retail  trade  would  give  us  approximately  the  remuneration 
which  an  ordinary  trader  might  reasonably  expect.  For  such 
an  average  would  be  raised  by  the  large  gains  of  the  successful 
minority:  and  these  large  gains  are  probably  in  most  cases  due  to 
the  possession  by  the  successful  trader  of  special  aptitudes  for  his 
business.  The  skill  required  by  a retail  trader  is  partly,  no  doubt, 
of  a kind  that  an  ordinary  man  can  acquire  by  a certain  definite 
outlay  of  time  and  instruction ; so  far  as  it  consists  of  the  arts 
of  reading,  writing,  and  book-keeping,  together  with  adequate 
knowledge  of  the  qualities  of  the  articles  in  which  he  deals.  But 
for  success  in  trade  it  would  seem  that  qualities  are  required 
which  instruction  cannot  ordinarily  give  in  the  required  degree, 
such  as  penetration,  vigilance,  quickness  of  resource  in  emer- 
gencies, and  tact  in  promptly  meeting  the  various  needs  or 
even  leading  the  tastes  of  consumers : for  only  thus  can  the 
trader  seize  the  opportunities  of  gain  great  and  small,  and 
avoid  the  dangers  of  loss,  which  the  changing  conditions  of 
supply  and  demand  are  continually  bringing  in  the  modem 
industrial  world.  Hence  the  earnings  of  traders  adequately 
gifted  with  these  qualities  will  tend  to  be  kept  high  by  the 
rarity  of  their  talents  relatively  to  the  field  of  emplo}Tnent  for 
them. 

are  thus  led  to  notice  the  only  remaining  important 
cause  of  inequalities  in  the  remuneration  of  different  kinds  of 
labour — the  scarcity  of  the  natural  gifts  required  for  the  most 
effective  performance  of  their  function.  I have  already  pointed 
out  that  in  almost  every  branch  of  industry  to  some  extent — 
but  to  very  different  extents  in  different  branches — wages  above 
the  average  can  be  earned  by  labour  of  superior  quality ; such 
superiorities,  speaking  generally,  being  due  partly  to  training 
and  partly  to  the  possession  of  natural  and  inherited  aptitudes 
above  the  average.  Where  such  superiority  is  exhibited  in 
producing  more  easily  and  abundantly  commodities  of  the  same 
quality  as  inferior  workers  can  supply,  the  extra  remuneration 


CHAP.  IX 


PARTICULAR  WAGES  AND  PROFITS  . 


329 


obtainable  by  it  is  in  a mannei'  analogous  to  the  high  rent  of 
fertile  land  used  for  ordinary  agricultural  purposes ; since,  as 
we  hav^seen,  the  superior  productiveness  of  land  from  which 
rent  ar^seL  ^s  due  partly  to  outlay  and  partly  to  natural  dif- 
ferences independent  of  labour*.  On  the  other  hand,  where 
the  commodity  produced  by  rare  skill  is  valuable  on  account  of 
its  special  qualities,  real  or  supposed,  the  reward  of  such  skill 
may  be  compared  to  the  high  rents  obtained  by  the  owners 
of  famous  vineyards  and  other  portions  of  land  of  which  the 
produce  is  peculiar  and  keenly  desired : while  again,  so  far 
as  the  services  of  any  one  individual  have — or  are  believed 
to  have — unique  qualities,  his  remuneration  is,  of  course, 
determined  under  the  conditions  of  strict  monopoly.  Both 
these  latter  cases  are  exemplified  by  the  rewards  of  the 
finer  kinds  of  intellectual  work,  such  as  Literature,  Painting, 
Mechanical  invention:  where  the  results  which  command  sub- 
stantial remuneration  cannot  be  obtained  by  education  alone,  but 
require  in  addition  natural  gifts  so  exceptional  that  the  reward  of 
their  possessors  is  at  most  but  partially  affected  by  competition. 
To  a less  extent  the  same  cause  is  operative  in  determining  the 
distribution  of  the  large  incomes  which  constitute  what  are 
called  the  “prizes”  of  the  professions  of  Advocate  and  Physician. 
The  workers  who  earn  these  large  incomes  are  believed  by  those 
who  use  their  services  to  possess  such  exceptional  skill  as  cannot 
be  acquired  by  mere  training  and  practice  without  rare^  natural 
gifts. 

Even  when  the  skill  required  is  not  sufficiently  exceptional 
in  fact  to  command  a scarcity  value,  the  difficulty  that  people 
in  general  have  in  ascertaining  the  fact  of  its  existence  often 
secures  a scarcity  rate  of  remuneration  to  the  professional  men 

* Even  in  employments  where  the  differences  in  skill  and  its  remuneration 
are  less  marked,  it  is  still  to  be  observed  that  the  outlay  on  education,  &c.,  which 
constitutes  Personal  Capital,  yields  a profit  varying  importantly  in  amount  in 
consequence  of  the  different  intellectual  and  moral  qualities  of  the  children 
educated. 

^ It  should  be  observed  that  when  we  speak  of  “ rare  ” skill,  the  term  is 
always  used  relatively  to  the  demand  for  the  products  or  services  of  the  skilled 
worker.  It  is  quite  possible  that  a given  kind  of  skill  may  be  confined  to  an 
extremely  small  minority  of  the  members  of  any  community,  and  yet  may  be 
so  abundant  relatively  to  the  demand  that  no  one  possessing  it  is  able  to  earn 
extra  remuneration  for  his  labour.  This  is  the  ease  {e.g.)  with  the  faculty  of 
writing  second-rate  poems. 


330 


POLITICAL  ECONOMY 


BOOK  II 


who  have  special  means  of  obtaining  good  recommendations; 
such  as  kinship  or  friendship  with  persons  who  enjoy  public 
confidence. 

This  leads  me  to  notice  another  cause  of  a different  kind 
which  renders  the  incomes  of  individual  traders  and  professional 
men  larger  than  they  would  otherwise  be ; and  which,  like  the 
scarcity  of  natural  qualities  just  discussed,  ought  to  be  specially 
noted  and  partly  discounted  in  estimating  the  average  remune- 
ration of  the  classes  to  which  they  belong.  I mean  the  impor- 
tant economic  fact  that  we  have  already  more  than  once  noted  h 
under  the  names  of  Goodwill  or  Connexion : i.e.,  the  widespread 
disposition  to  use  the  services  of  a particular  individual  rather 
than  his  competitors,  not  necessarily  on  account  of  any  belief 
in  their  superior  quality,  nor  even  through  kinship  or  personal 
acquaintance  with  the  individual  himself  or  his  friends,  but 
merely  from  the  force  of  habit.  We  have  already  seen  that 
this  Goodwill  is  to  a certain  extent  a saleable  commodity;  so 
far  then  as  it  has  been  purchased,  the  extra  remuneration 
obtained  by  it  is,  from  the  point  of  view  of  the  individual,  in- 
terest on  capital  laid  out.  It  is  evident  that  in  estimating 
the  average  return  for  labour  in  any  employment  in  which 
earnings  are  largely  increased  by  such  Goodwll  or  Connexioq 
we  ought  not  to  reckon  the  whole  of  the  extra  earnings  due  to 
this  cause,  but  only  the  amount  that  an  average  man  ■with 
ordinary  training  and  industry  may  fairly  expect  to  acquire  for 
himself. 

§ 3.  We  have  now  come  to  the  point  at  which  it  is  desirable 
to  concentrate  our  attention  on  that  important  portion  of  the 
produce  of  industry  which  is  fi'equently  but  errorteously  in- 
cluded in  the  “capitalists’”  share:  that  is,  the  element  of  the 
profit  made  by  the  employers  of  capital  which  is  in  excess  of 
the  interest  that  they  might  have  obtained  without  working, 
and  which  accordingly  I have  distinguished  as  Wages  of 
Management.  It  is  an  important  defect  of  English  Political 
Economy  that  it  has  not,  for  the  most  part,  conceived  this 
element  of  the  employers’  gains  ^\dth  sufficient  steadiness  and 
clearness  as  a species  of  remuneration  of  labour — which  it  un- 
doubtedly is.  Even  Mill’s  exposition — in  spite  of  his  careful 


’ See  Book  i.  c.  iii. 


CHAP.  IX 


PARTICULAR  WAGES  AND  PROFITS 


331 


analysis  of  profit  into  interest,  risk,  and  “ wages  of  super- 
“intendence” — exhibits  in  important  parts  of  the  argument  a 
want  of  distinction  between  profit  and  interest,  and  a tendency 
to  identify  “returns  to  capital”  with  the  former  instead  of  the 
latter,  which  seem  to  me  highly  confusing^  If  we  consider  the 
large  amounts  of  capital  possessed  by  joint-stock  companies, 
as  well  as  all  that  is  lent  to  private  men  of  business,  it  must 
be  evident  that  the  greatest  part  of  the  capital  of  England  is 
now  really  owned  by  persons  other  than  those  who  receive  the 
remuneration  for  managing  it.  When  Ricardo  and  M'Culloch 
wrote,  this  was  far  less  the  case  than  it  is  at  present ; so  that 
the  identification  of  capitalists  and  employers  was  more  natu- 
rally suggested  by  the  facts  of  industry. 

It  is,  I think,  partly  in  consequence  of  this  confusion  that  so 
many  political  economists  have  found  no  difficulty  in  assuming 
that  the  rate  of  profit^ — allowing  for  differences  of  sacrifice  and 
risk’  in  different  employments — tends,  on  the  average,  to  be 
simply  proportioned  to  the  amount  of  capital  on  which  it  is 
earned,  just  as  the  rate  of  interest  does ; without  feeling  called 
upon  to  explain  how  the  employers’  “wages  of  superintendence” 
come  to  vary  precisely  in  the  same  ratio  as  the  capital  superin- 
tended. For,  as  I have  briefly  argued  in  a previous  chapter^, 
this  latter  result  certainly  does  not  follow  as  an  immediate  and 
obvious  deduction  from  the  hypothesis  of  unrestricted  industrial 
competition.  On  the  other  hand,  it  does  follow  from  that 
hypothesis,  that  if  this  proportion  between  employers’  earnings 
and  capital  is  really  maintained,  it  must  either  be  (1)  because 
the  trouble  and  anxiety  of  management  increase  in  exact  pro- 
portion to  the  amount  of  capital  managed ; or  (2)  because,  in  the 
competition  of  employers  for  the  profits  of  business,  the  owners 
of  large  capitals  enjoy  some  special  advantages.  The  former  of 
these  causes  can  hardly  be  regarded  as  adequate  to  produce  the 
effect.  In  trade,  for  instance,  it  seems  no  more  trouble  to  order 

’ My  attention  was  first  drawn  to  this  point  by  Mr  F.  A.  Walker’s 
excellent  book  on  “Wages.” 

It  may  be  worth  while  to  point  out,  with  Mr  Macleod,  that  throughout  this 
discussion,  “rate  of  profit”  must  be  understood  to  mean  “rate  of  profit  earned 
“within  a given  period  of  time,”  not  “rate  of  profit  earned  on  each  transaction.” 

^ When  we  are  considering  what  average  profits  generally  tend  to  amount  to, 
the  element  of  “indemnity  for  risk”  disappears. 

* See  page  201. 


332 


POLITICAL  ECONOMY 


BOOK  II 


£2000  worth  of  sugar  than  to  order  £1000  worth ; and  though 
it  is  more  troublesome  to  manage  a large  factory  than  one  half 
the  size,  it  can  hardly  be  twice  as  troublesome.  It  may  be  said, 
however,  that  the  personal  sacrifice  which  a capitalist  makes 
in  enduring  the  labour  and  worry  of  business  increases  with 
the  size  of  his  capital,  and  the  extent  of  the  opportunities 
consequently  open  to  him  of  enjQjdng  life  without  working. 
And  this  is  perhaps  true,  so  far  as  we  estimate  sacrifice  merely 
relatively  to  the  individual  who  makes  it : no  doubt  a certain 
number  of  large  capitalists  prefer  to  live  on  interest  alone  rather 
than  increase  their  income  by  labour,  and  we  may  assume  that 
a somewhat  larger  number  would  make  this  choice,  if  the  addi- 
tional income  obtainable  by  labour  Avere  materially  reduced. 
But  this  is  not  in  itself  a sufficient  reason  why  free  competition 
should  provide  large  capitalists  with  the  extra  wages  of  manage- 
ment necessary  to  induce  them  to  Avork;  since,  as  we  before 
noted,  the  competitive  remuneration  of  any  kind  of  labour  does 
not  tend  to  include  compensation  for  the  extra  aversion  felt  to  it 
by  some  of  the  labourers,  except  so  far  as  such  compensation  is 
required  to  obtain  the  Avhole  amount  of  the  labour  in  question 
that  society  is  Avilling  to  buy,  even  at  the  raised  price.  If 
large  capitalists  AAuthdreAv  from  business,  because  their  average 
wages  of  management  were  insufficient  to  induce  them  to  Avork, 
they  must  still  leave  their  capital  to  be  employed  in  some  way, 
in  order  to  get  their  interest ; and  though  their  Avithdrawal 
might,  by  increasing  the  supply  of  capital  offered  for  loan  or 
joint-stock  investment,  temporarily  loAver  interest  and,  therefore, 
increase  wages  of  management,  there  seems  no  reason  Avhy  this 
latter  rise  should  be  permanent,  supposing  that  an  adequate 
supply  of  equally  good  managers  is  obtainable  at  the  lower  rate 
of  remuneration  Avhich  the  discontented  capitalists  Avere  getting. 
Hence  if  the  strict  proportion  of  employeis’  earnings  to  capital 
employed  is,  on  the  average,  approximately  realised,  it  must  be 
on  the  second  of  the  grounds  above  mentioned : the  large 
capitalist  must  have  special  advantages  in  the  competition  of 
men  of  business  Avhich  somehoAV  enable  him  to  sell  his  services 
to  industry  at  a price  graduated  in  proportion  to  the  magnitude 
of  his  business.  Let  us  examine  hoAV  far,  and  in  Avhat  way,  this 
is  likely  to  be  the  case. 

In  the  first  place,  it  is  obvious  that  the  employer’s  wages 


CHAP.  IX 


PARTICULAR  WAGES  AND  PROFITS 


333 


of  management  will  be  proportioned  to  his  capital  so  far  as  the 
pecuniary  cost  of  production  to  the  employer,  in  any  branch  of 
industry,  does  not  vary  materially  with  the  scale  of  production : 
since,  under  free  competition,  the  market-price  of  the  product 
must  be  the  same — assuming  that  there  is  no  difference  of  quality 
— however  it  may  have  been  produced.  We  cannot,  however, 
assume  generally  that  cost  of  production  is  approximately  the 
same  for  small  and  large  employers  alike;  e.g.,  we  have  seen^ 
that  in  certain  kinds  of  agriculture,  where  much  is  gained  by 
minute  and  vigilant  tendence,  the  small  producer  is  commonly 
thought  to  have  a decided  advantage : so  far,  then,  as  this  is 
the  case,  we  may  assume  that  the  small  employer  will  earn  a 
higher  rate  of  profit  (per  cent,  of  capital)  than  the  employer 
who  uses  more  capital.  So,  again,  if  retail  trade  is  more 
effectively  carried  on  in  small  shops,  the  retail  trader  will  tend 
to  receive  a proportionally  larger  annual  profit  on  his  capital 
than  the  wholesale  trader — independently  of  any  additional 
profit  on  each  transaction,  that  may  be  necessary  to  compensate 
for  the  less  rapid  turn-over.  The  question,  then,  is  why  self- 
interest  does  not  in  the  long  run  prevent  business  from  being 
conducted  on  a small  scale,  except  when  it  is  economically  ad- 
vantageous; why  the  small  capitalist  does  not  either  (1)  become 
a large  employer  by  borrowing  money,  or  (2)  unite  his  capital 
with  that  of  other  small  owners,  and  become  a shareholder  in 
a joint-stock  company. 

It  is  easy,  however,  to  see  that  the  first  of  these  expedients 
can  only  be  adopted  to  a limited  extent.  The  owner  of  a small 
capital  cannot  ordinarily  borrow  beyond  a small  amount,  except 
at  an  unremunerative  rate ; his  whole  capital  being  exposed  to 
the  risks  of  business,  he  cannot  give  adequate  security  to  the 
lender.  Hence  the  owners  of  large  capitals  are  partially  exempt 
from  the  competition  of  smaller  capitalists  in  the  management 
of  private  businesses  on  a large  scale;  from  causes  similar  to 
those  which,  as  we  have  just  seen,  partially  exempt  each  of  the 
different  grades  of  labour  from  the  competition  of  the  grade 
below.  It  is  true  this  exemption  can  only  be  partial,  in  a 
society  with  an  abundant  supply  of  capital  continually  available, 
and  an  active  competition  for  customers  on  the  part  of  banks 


1 Book  I.  c iv.  § 7,  pp.  116,  117. 


334 


POLITICAL  ECONOMY 


BOOK  II 


and  other  lenders.  In  such  societies,  as  Mr  Walker  says,  if 
a small  capitalist  has  a “ genius  for  business,  want  of  capital  is 
“ not  likely  to  keep  him  under.”  A man  who  as  manager  for 
another,  or  as  employer  on  a small  scale,  has  given  conspicuous 
evidence  of  skill,  prudence,  and  probity,  will  be  able  to  borrow 
gradually  increasing  amounts  of  money ; so  that,  by  the  augmen- 
tation of  both  his  own  and  his  borrowed  capital,  he  may  end  by 
rivalling  the  largest  producers.  But  such  men  are  likely  to 
be  rare,  no  less  than  persons  who  start  with  large  capitals ; 
hence  either  class  will  tend,  so  long  as  industr}"  is  organised  in 
private  businesses,  to  obtain  for  his  services  what  in  a certain 
sense  may  be  called  a scarcity  price : i.e.,  a rate  of  “ wages  of 
“ management”  which  would  be  lowered  if  large  capitals  (or  men 
with  a genius  for  business)  became  more  numerous,  other  things 
remaining  the  same. 

But  why  then — it  may  be  asked — do  not  large  capitals  under 
one  management  become  more  numerous  by  the  association  of 
small  capitals  into  joint-stocks,  for  can^dng  on  production  on 
a large  scale  ? In  the  first  place,  even  supposing  the  rate  of 
profit  to  be  strictly  proportioned  to  the  capital  employed,  it  is 
quite  possible  that  the  wages  of  management  even  of  the  com- 
paratively small  capitalist  may  be  higher  than  the  remuneration 
he  would  obtain  for  his  labour  in  any  other  career ; and  that 
consequently  there  may  not  be  a sufficient  amount  of  capital 
owned  by  non-employers  to  offer,  when  aggregated  into  joint- 
stocks,  a formidable  competition  to  the  large  private  employers. 
Where  this  is  not  the  case,  where,  as  in  our  o’ira  society  at  the 
present  day,  the  annual  sa\dngs  of  professional  men  and  others 
supply  continually  a large  stream  of  capital  that  has  to  be 
managed  by  persons  who  do  not  o^vn  it,  there  can,  I think, 
be  no  doubt  that  the  competition  of  joint-stock  companies 
does  tend  somew^hat  to  reduce  the  rate  of  profit  of  private 
employers.  Still,  this  tendency  is  strictly  limited.  For,  firstly, 
assuming  the  two  modes  of  management  to  be  equally  effective 
and  economical,  the  private  capitalist  would  still  have  an  ad- 
vantage, as  he  would  avoid  the  trouble  and  expense  generally 
involved  in  collecting  the  capital  of  u joint-stock  company. 
And  secondly — what  is  more  important — the  private  employer 
has  the  economic  advantage  of  being  impelled  by  a stronger 
stimulus  to  exertion  than  the  manager  or  directors  of  a 


CHAP.  IX 


PARTICULAR  WAGES  AND  PROFITS 


335 


company ; for  “ no  contrivance  that  has  yet  been  invented  can 
“ supply  the  place  of  the  feeling  that  the  workman  is  labouring 
“not  for  another  but  for  himself”^  On  these  grounds,  other 
things  being  the  same,  a man  of  sufficient  business  talents  to 
obtain  employment  as  the  manager  of  a company  is  likely  to 
earn,  on  the  average,  a higher  rate  of  remuneration  if  he  is  the 
owner  of  the  capital  he  employs  than  if  he  is  a hired  manager ; 
though  his  advantage  varies  very  much  with  the  nature  of  the 
business,  being  (as  Adam  Smith  observed)  less  in  proportion 
as  a business  is  simple  and  can  be  reduced  to  “ what  is  called 
“ a routine.” 

Nor  has  it  yet  been  shewn  that  this  advantage  can  be 
materially  diminished  through  the  adoption  of  the  principle  ol 
“ Co-operative  Production  ” or  Industrial  Partnership,  by  which 
each  employee  in  a business  has  a share  of  the  profits  allotted 
to  him.  It  is  true  that  by  this  means  that  part  of  the  employer’s 
function,  which  consists  in  superintendence  or  overlooking, 
may  be  partly  rendered  superfluous  through  the  pecuniary 
concern  that  each  has  in  the  efficiency  of  his  own  work,  and 
still  more  through  the  concern  that  all  have  in  the  efficiency 
of  the  work  of  each.  But,  generally  speaking,  the  more  im- 
portant part  of  the  work  of  management  consists  in  organising 
and  directing  the  operations  of  a business  considered  as  a whole, 
— e.g.,  in  the  case  of  a manufacturer,  settling  what  is  to  be  made 
and  in  what  manner,  where  materials,  raw  and  auxiliary,  are  to 
be  bought,  when  finished  products  are  to  be  sold,  &c.,  &c., — and 
in  distributing  functions  among  the  workers  employed  in  the 
business.  This  work  cannot  be  superseded  or  reduced  by  in- 
dustrial partnership ; and  it  is  even  liable  to  be  made  more 
difficult;  since  the  secrecy  necessary  to  the  success  of  many 
operations  of  business  is  liable  to  arouse  jealousies  and  sus- 
picions among  the  workers  who  are  to  share  the  profits. 

It  seems,  therefore,  that  industrial  competition  does  not 
necessarily  tend  to  prevent  the  services  of  large  capitalists  who 
engage  in  business  from  being  remunerated  at  a rate  consider- 
ably higher  than  that  obtainable  by  similar  labour  on  the  part 
of  employers  who  own  smaller  capitals.  And  that  this  result 
is  actually  produced  in  England  and  similar  countries  at  the 


1 Hearn’s  Plutology,  c.  xiii.  § 9. 


336 


POLITICAL  ECONOMY 


BOOK  n 


present  time  may  be  inferred  with  a high  degree  of  probability 
from  the  general  unquestioning  acceptance  of  the  traditional 
economic  doctrine,  that  employers’  earnings,  as  well  as  interest, 
tend  to  be  proportioned  to  amount  of  capital  employed.  I know, 
however,  no  adequate  ground  for  regarding  this  generally  ac- 
cepted proposition  as  at  all  a close  approximation  to  actual  fact. 
It  is,  no  doubt,  a natural  inference  from  the  fact  that  large  and 
small  businesses  exist  prosperously  side  by  side  in  the  same 
industry,  assuming  that  the  respective  economic  advantages 
of  the  different  scales  of  production  are  fairly  balanced.  But 
in  many  cases  this  assumption  would  be  unwarranted;  and 
even  where  it  is  legitimate,  the  inference  that  the  rate  of  profit 
per  cent,  of  capital  is  uniform  overlooks,  I conceive,  the  real 
nature  of  the  source  of  income  which  I have  several  times 
spoken  of  as  “ Business  Connexion.”  On  the  average,  a large 
capitalist  cannot  obtain  a large  business  by  merely  investing 
his  money  in  certain  kinds  of  real  capital ; he  can  only  obtain 
it  gradually  as  his  connexion  extends ; and,  therefore,  when 
obtained,  a certain  portion  of  the  surplus  income  derived  from 
his  business,  after  subtracting  interest  on  his  material  capital, 
is  not  properly  remuneration  for  present  work,  but  interest  on 
the  outlay  of  labour  or  wealth  made  during  the  earlier  years  of 
the  business.  I may  observe  further  that  in  the  important 
case  of  agriculture  the  received  economic  doctrine  regards  an 
employer  as  tending  under  competition  to  obtain  “ordinary 
“ profit  ” not  on  the  whole  amount  of  capital  used  by  him,  but 
only  on  a certain  portion : for  the  farmer  uses,  besides  his 
own  capital,  a certain  amount  of  capital  belonging  to  his  land- 
lord ; yet  he  is  never  supposed  to  obtain  any  considerable  wages 
of  management  for  this  latter,  but  only  to  get  ordinary  profit 
on  his  own  or  borrowed  capital.  And  it  seems  on  general 
grounds  improbable  that  an  employer  tends  to  earn  equal  profit 
on  all  parts  of  the  capital  employed  by  him,  wherever  the 
trouble  of  managing  diiferent  parts  of  the  capital  is  materially 
different. 

To  sum  up : a portion  of  the  fund  which,  in  the  preceding 
chapter,  we  regarded  as  the  share  of  labour  in  the  aggregate 
has  been  found  on  closer  examination  to  be  really  interest  on 
personal  capital,  by  which  the  wages  of  various  kinds  of  skilled 
labour  tend  to  be  increased  by  an  amount  proportioned,  on  the 


CHAP.  IX 


PARTICULAR  WAGES  AND  PROFITS 


337 


average,  to  the  expense  of  time  and  money  ordinarily  needed 
for  the  acquisition  of  the  skill.  As  regards  the  division  of  the 
remainder,  industrial  competition  tends  to  equalise  the  shares 
obtained  by  ordinary  labourers  in  different  callings,  provided 
they  are  not  materially  unequal  either  in  natural  qualifications 
or  in  respect  of  the  amounts  of  capital  possessed  by  themselves 
or  their  parents,  except  so  far  as  differences  in  wages  are  com- 
pensatory for  diflferences  in  the  sacrifices  entailed  by  different 
employments,  or  in  the  unpurchased  advantages  incident  to 
them.  But  the  possessors  of  capital,  real  and  personal,  as  well 
as  persons  endowed  with  rare  natural  gifts,  are  likely  to  have — 
by  reason  of  their  limited  numbers — important  advantages  in 
the  competition  that  determines  relative  wages ; in  consequence 
of  which  the  remuneration  of  such  persons  may — and  in  England 
often  does — exceed  the  wages  of  ordinary  labour  by  an  amount 
considerably  larger  than  is  required  to  compensate  them  for 
additional  outlay  or  other  sacrifices;  such  excess  tending  to 
increase  as  the  amount  of  capital  owned  by  any  individual 
increases,  but  in  a ratio  not  precisely  determinable ' by  general 
considerations. 


s.  P.  K. 


22 


CHAPTER  X. 


MONOPOLY  AND  COMBINATION. 

I 1.  The  effects  of  Combination  in  increasing  profits  and 
wages  have  attracted  much  attention  in  recent  years,  owing 
partly  to  the  action  of  Trades-Unions,  partly  to  the  large  gains 
made  by  successful  combinations  of  merchants  for  the  tem- 
porary monopoly  of  some  indispensable  or  keenly  demanded 
product.  Such  combinations,  when  manifest  and  manifestly 
profitable,  have  commonly  e.xcited  dislike,  as  the  gain  accruing 
from  them  is  primd  facie  obtained  at  the  expense  of  the  rest  of 
the  community,  and  frequently  Avith  some  loss  to  the  commu- 
nity as  a whole  : and  in  the  particular  case  of  Trades-Unions, 
some  writers  have  spoken  of  them  as  “ interferences  with  the 
“ laws  of  Political  Economy.”  But  if  this  phrase  is  intended  to 
denote  the  laws  investigated  by  economic  science,  the  statement 
appears  manifestly  incorrect.  The  price  of  a monopolised  article 
has  its  own  economic  laws,  and  can  in  most  cases  be  theoretically 
determined  on  the  hy]jothesis  that  every  individual  concerned 
intelligently  seeks  his  private  pecuniary  interest,  no  less  than 
the  price  of  an  article  sold  by  competing  dealers : and  the  only 
effect^  of  a Trade-Union  or  any  other  Combination  is  to  bring 
the  supply  of  the  commodity  of  which  the  sellers  combine  under 
the  conditions  of  a more  or  less  perfect  monopoly. 

Hence — though  I have  followed  usage  in  conceiving  free 
competition  to  exclude  combination — it  seems  desirable,  in 
working  out  the  consequences  of  the  general  assumptions  on 
which  the  theory  of  competitive  distribution  proceeds,  to  include 
an  investigation  of  the  conditions  under  which  self-interest  will 

’ Provided,  of  course,  that  the  combiners  attain  their  end  by  purely  peaceful 
and  legal  means. 


CHAP.  X 


MONOPOLY  AND  COMBINATION 


339 


prompt  to  combination,  and  of  the  extent  of  gain  which  the 
persons  combining  may  realise.  In  the  present  chapter,  then, 
I shall  be  especially  concerned  to  trace  out  the  economic  effects 
of  this  kind  of  combination,  regarding  it  merely  as  one  mode  of 
constituting  monopoly:  and  I shall  suppose  here,  as  in  the 
preceding  chapters,  that  neither  party  in  any  exchange  is 
restrained  in  the  pursuit  of  its  OAvn  interests  by  any  regard 
to  the  interests  of  the  other  party.  I do  not  here  consider  how 
far  this  supposition  has  been  actually  realised  in  the  operations 
of  Trades-Unions  for  the  purpose  of  raising  or  keeping  up 
wages,  or  in  those  of  the  counter-combinations  of  employers 
which  have  at  various  times  and  places  kept  down  wages.  Nor, 
again,  do  I consider  here  how  far  it  represents  a right  principle 
of  conduct,  or  one  conducive  to  the  economic  wellbeing  of  the 
community.  This  latter  is  a question  to  which  our  attention 
will  be  drawn  in  the  course  of  the  next  Book. 

In  a preceding  chapter  I have  briefly  explained  the  general 
determination  of  the  price  of  a monopolised  commodity,  in  the 
case  of  material  products ; and  the  view  there  given  has  no  less 
application  to  the  case  in  which  the  commodity  sold  is  labour 
measured  by  time.  The  monopolist,  so  far  as  he  aims  singly  at 
his  own  pecuniary  interest,  will  endeavour  to  sell  the  precise 
amount  which  will  yield  him  the  maximum  net  profit,  after 
defraying  the  expenses  of  production.  We  may  assume  gene- 
rally, that,  in  order  that  a monopoly  may  be  a source  of  gain, 
the  amount  sold — within  a certain  time — must  be  somewhat 
less  than  it  would  be  if  there  were  no  monopoly* ; for  otherwise, 
whatever  extra  profit  the  monopolist  ma}^  make  by  the  high 
price  of  his  commodity  cannot  be  strictly  attributed  to  the 
monopoly,  since  the  price  would  have  tended  to  be  the  same  if 
the  supply  had  been  in  the  hands  of  a number  of  sellers  com- 
peting freely.  The  restriction  in  amount  sold  may  be  brought 
about  either  directly  by  limiting  the  amount  brought  to  market, 
or  indirectly  by  keeping  up  the  price.  In  the  latter  case  the 
restriction  may  not  be  intended  by  the  monopolist,  and  he  may 

1 That  is,  if  the  price  offered  for  the  commodity  is  not  influenced  by  open 
or  tacit  combination  among  the  purchasers.  As  will  hereafter  be  stated,  the 
determination  of  price  resulting  from  a struggle  between  a combination  of 
sellers  and  a combination  of  purchasers  lies  beyond  the  scope  of  the  theory 
here  expounded. 


22—2 


340 


POLITICAL  ECONOMY 


BOOK  n 


possibly  be  even  ignorant  of  its  existence ; but  according  to  our 
general  assumption  as  to  the  relation  of  Value  to  Demand,  the 
maintenance  of  a high  price  of  any  commodity  must  ceteris 
paribus  render  the  amount  sold  less  than  it  would  have  been  if 
the  price  had  been  allowed  to  fall ; though  in  the  case  of  neces- 
saries of  life,  and  other  commodities  of  which  the  demand  is 
inelastic,  the  reduction  in  sale  may  sometimes  be  comparatively 
slight,  even  for  a considerable  rise  in  price.  The  extent  to  which 
the  restriction  of  sale  has  to  be  carried,  in  order  to  realise  the 
maximum  profit  attainable,  depends  primarily  on  the  precise 
extent  to  which  the  demand  for  the  commodity  varies  wuth 
variations  in  its  price ; and,  as  was  pointed  out,  it  may  easily 
happen,  in  the  case  of  some  articles,  that  several  difierent 
amounts  of  supply  would  bring  in  about  the  same  net  profit 
to  the  monopolist.  Again,  it  has  to  be  observed  that  (1)  mono- 
poly may  either  be  permanent  (so  far  as  can  be  foreseen),  or 
more  or  less  definitely  limited  in  time ; and  (2)  that  the  supply 
may  either  be  absolutely  incapable  of  being  increased — as  in 
the  case  of  pictures  of  a deceased  artist — or  the  monopolist  may 
control  the  indispensable  means  of  increasing  it.  In  this  latter 
case  he  will  have  to  calculate  not  only  the  variations  of  demand 
corresponding  to  variations  of  price,  but  also  the  variations  of 
cost  of  production  coiresponding  to  variations  in  the  amount 
supplied. 

§ 2.  But  before  we  proceed  to  discuss  this  particular  species 
of  combination,  it  will  be  desirable  to  obtain  a fuller  definition 
of  the  notion  of  Monopoly — as  we  shall  find  it  convenient  to  use 
it — and  a more  complete  view  of  the  different  modes  and  degrees 
in  which  monopoly  generally,  and  especially  monopoly  resulting 
from  combination,  admits  of  being  realised  \ 

’ Throughout  the  discussion  that  follows  I shall  assume  that  the  special 
gains  of  the  monopolist  or  of  the  combination  of  sellers  are  realised  by  raising 
the  price  of  the  commodity  monopolised.  1 ought,  however,  to  notice  the  fact 
that — chiefly  in  the  markets  for  securities — combinations  of  sellers  are  some- 
times formed  which  are  designed  to  have,  and  actually  do  have,  the  opposite 
effect  of  lowering  the  price  of  the  commodity  sold. 

The  motive  for  forming  such  combinations  is  the  hope  of  gaining  ultimately, 
by  purchasing  at  the  lowered  prices,  considerably  more  than  is  lost  by  the  sales 
that  force  the  price  down.  There  would,  however,  be  no  reasonable  prospect  of 
realising  this  hope,  except  by  accident,  if  such  sales  produced  no  further  fall  in 
price  than  that  which  resulted  directly  from  the  increase  of  supply  by  the  com- 
bining speculators : since,  ceteris  paribus,  their  purchases  would  tend  to  raise  the 


CHAP.  X 


MONOPOLY  AND  COMBINATION 


341 


In  treating  of  Monopoly  in  chapter  ii.,  I denoted  by  the  word 
the  control  exercised  by  an  individual  sellef  or  combination  of 
sellers  over  a commodity  that  no  one  else  can  bring  to  market. 
Here,  however,  it  is  convenient  to  use  the  term  more  widely. 
In  the  first  place,  it  is  convenient  to  extend  it  to  cases  in  which 
a person  or  union  of  persons — whom,  for  brevity,  I will  call 
“the  monopolist” — cannot  control  more  than  a portion  of  the 
whole  supply  of  the  commodity;  since  such  a partial  control 
may  render  possible  and  profitable  an  artificial  rise  in  the 
price  of  the  commodity,  even  though  the  remainder  is  supplied 
by  several  sellers  freely  competing ; if  only  the  proportion 
controlled  is  so  large  that  its  withdrawal  would  cause  a serious 
scarcity,  and  thus  considerably  raise  the  competitively  deter- 
mined value  of  the  uncontrolled  remainder.  Such  a partial 
monopoly  confers,  of  course,  only  a limited  power  of  raising  the 
price  of  the  commodity  controlled ; the  limit  of  possible  eleva- 
tion being  fixed  somewhere  below  the  price  to  which  scarcity 
would  raise  the  unmonopolised  supply,  if  the  monopolised 
portion  were  withdrawn  from  the  markets  Further,  if  the 
commodity  is  one  that  can  be  produced  in  unlimited  quantities, 
such  a partial  monopoly  can  only  be  effective  temporarily,  and 
only  so  far  as  purchasers  of  the  commodity  cannot  postpone 
their  purchases  Avithout  serious  loss  or  inconvenience.  And 
where  the  monopolist  prodmes  as  well  as  sells  the  commodity, 
he  will  have  to  take  into  account  the  future  loss  likely  • to 
result  to  him  from  the  stimulus  given  by  the  rise  in  price  to 
the  production  beyond  his  control ; unless  he  can  reckon  on 

price  again  in  precisely  the  same  proportion  as  their  sales  had  depressed  it. 
The  reason  why  such  operations  are  profitable  lies  in  the  imitative  proceedings 
of  other  persons  holding  the  same  securities,  who  infer  from  the  sales  that  the 
stock  is  expected  to  fall  further,  and  therefore  are  induced  to  sell  their  own 
stock,  in  order  to  avoid  the  further  fall,  instead  of  buying.  A similar  ex- 
planation applies,  mutatis  mutandis,  to  the  parallel  case  in  which  combinations 
of  buyers  are  successfully  made  with  the  view  of  raising  prices. 

Such  operations  are  of  doubtful  legitimacy,  even  according  to  the  ordinary 
standard  of  commercial  morality:  since  the  speculators  do  not  merely  expect 
to  profit  by  the  mistakes  of  others,  but  by  mistakes  that  they  have  themselves 
intentionally  caused.  I have  not,  therefore,  thought  it  necessary  to  give  them 
more  than  this  passing  notice. 

* In  the  above  reasoning  it  is  assumed  that  the  other  sellers  do  not  enter 
into  the  kind  of  tacit  combination  with  the  monopolist  of  which  I shall  speak 
presently.  In  practice  they  would,  under  certain  circumstances,  be  very  likely 
to  do  this  to  some  extent. 


342 


POLITICAL  ECONOMY 


BOOK  II 


withdrawing  his  capital  from  the  business  without  loss,  before 
this  stimulus  has  so  much  increased  supply  as  to  render  it 
impossible  for  him  to  sell  his  own  produce  even  at  an  ordinarily 
remunerative  price. 

Secondly,  even  where  the  control  exercised  by  the  monopolist 
extends  over  the  whole  supply  of  his  commodity  available  at 
any  particular  time,  we  may  still  distinguish  different  degrees 
of  completeness  in  the  monopoly.  Thus  (1)  the  monopoly  may 
be — so  , far  as  can  be  foreseen — indestructible,  either  perma- 
nently or  for  a certain  determinate  period : that  is,  it  may  be 
impossible  to  obtain  the  commodity  in  question  at  all,  except 
from  the  monopolist.  An  artist  or  author  of  repute  enjoys 
a monopoly  of  this  degree ; as  also  do  the  holders  of  certain 
patents  and  proprietors  of  springs  or  vineyards  recognised  as 
unique  an  quality.  Or  (2)  the  monopoly  may  be  merely  secured 
by  the  jirospective  unprofitableness  of  the  outlay  of  wealth 
or  labour  (or  both)  that  would  be  required  to  provide  the  com- 
modity from  other  sources ; whether  such  outlay  were  under- 
taken by  an  association  of  the  consumers  of  the  monopolised 
commodity,  or  as  an  ordinary-  business  venture  on  the  part  of 
other  persons.  In  case  (2)  the  monopolist’s  calculations  will  be 
more  complicated  than  in  case  (1);  since  he  will  not  only  have  to 
consider  the  law  of  the  demand  for  his  commodity,  but  also  to 
calculate  how  far  any  rise  in  his  charges  may  seriously  increase 
the  danger  of  an  attempt  to  break  doara  the  monopoly.  And 
it  will  often  be  prudent  for  him  to  keep  his  price  well  below  the 
point  at  which  this  danger  becomes  formidable,  especially  when 
he  has  much  capital — personal  or  non-personal — invested  in  his 
business : since  an  attack  on  his  monopoly,  even  when  it  does 
not  turn  out  profitable  to  the  undertakers,  may  easily  have  the 
effect  of  not  only  annihilating  his  extra  gains,  but  even  reducing 
the  returns  to  his  capital  considerably  below  the  average.  This 
second  degree  of  monopoly  often  results  from  the  occupation  of 
a limited  department  of  industiy,  in  which  production  on  a large 
scale  is  necessary  or  highly  expedient,  by  a single  large  firm  or 
joint-stock  company,  or  a few  such  firms  or  companies  acting  in 
combination. 

Thirdly,  it  will  be  convenient  to  extend  the  term  “ monopoly  ” 
to  include  the  case  where  it  is  in  the  power  of  a combination  of 
buyers — or  a single  wealthy  buyer — to  control  the  price  and 


CHAP.  X 


MONOPOLY  AND  COMBINATION 


343 


extent  of  sale  of  a certain  commodity.  In  speaking  of  this  as 
a case  of  “ buyers’  monopoly,”  we  are  not,  of  course,  to  be  under- 
stood as  implying  that  the  whole  medium  of  exchange  in  any 
community  is  under  a single  control.  All  that  is  required,  to 
make  such  a monopoly  practically  complete,  is  that  a single 
individual  or  combination  may  furnish  the  only  effective  demand 
for  some  particular  commodity:  i.e.,  that  no  one  else  may  be 
willing  to  pay  anything  for  it.  Under  these  circumstances, 
if  the  commodity  is  supplied  by  several  persons  competing 
freely,  the  buyers’  monopoly  may  obviously  exercise  a control 
over  the  price  substantially  similar  in  kind  and  degree — though 
of  course  opposite  in  direction — to  that  exercised  by  a seller’s 
monopoly.  If  the  purchaser  has  not  to  consider  future  needs, 
and  if  the  product  cannot  be  kept,  or  if  the  prospect  of  selling 
it  is  not  likely  to  improve,  the  purchaser’s  power  of  profitably 
reducing  the  price  is  not  definitely  limited  except  by  the  utility 
of  the  commodity  to  the  seller — allowing  for  any  disadvantage 
that  may  result  to  the  latter  in  future  transactions  from  the 
precedent  of  a low  price.  More  ordinarily  the  purchaser’s  need 
will  be  continuous  or  recurrent ; and  in  this  case  his  reduction 
of  price  will  be  checked  by  the  danger  of  ultimate  loss  through 
the  diminution  of  future  supply  which  the  lowered  price  may  be 
expected  to  cause. 

It  should  be  said  that,  generally  speaking,  a combination  of 
buyers  will  be  more  difficult  to  establish  and  maintain  than 
a combination  of  sellers,  since  buyers  are  likely  to  be  both 
more  numerous  and  more  dispersed.  But  there  are  important 
exceptions  to  this  rule.  For  instance,  the  wholesale  merchants 
who  deal  in  a particular  product  will  generally  be  less 
numerous  than  the  producers  fi'om  whom  they  buy.  And  it  is 
probable  that  combinations  of  such  dealers  to  keep  down  the 
prices  paid  by  them  to  producers  have  often  been  successfully 
effected,  especially  in  early  stages  of  commercial  development. 
When,  however,  producers  as  well  as  merchants  belong  to  a 
community  commercially  advanced,  such  a monopoly  of  mer- 
chant buyers  will  be  rather  hard  to  maintain  long,  owing  to  the 
ease  and  rapidity  with  which  capital  can  be  turned  into  any 
branch  of  wholesale  dealing^ 

' It  may  be  observed  that  such  a combination  of  dealers  may  exercise 
monopoly — -in  the  extended  sense  above  proposed — on  two  sides ; i.e. , in  relation 


344 


POLITICAL  ECONOMY 


BOOK  n 


There  would  generally  be  somewhat  less  difficulty  in  main- 
taining a combination  of  farmers  or  manufacturers  to  reduce 
(or  keep  low)  the  price  of  the  labour  employed  by  them, — 
supposing  that  the  labourers  did  not  form  a counter-combina- 
tion. In  this  case,  if  we  assume  industrial  competition  so 
perfect,  that  labourers  can  and  will  change  their  residence  and 
employment  when  it  is  perceptibly  their  interest  to  do  so,  the 
highest  limit  of  the  employers’  possible  gain  through  combina- 
tion would  tend  to  be  fixed  by  the  point  at  which  the  correspond- 
ing loss  to  the  labourers  would  outweigh  the  disadvantages, 
pecuniary  and  sentimental,  of  migrating  to  some  district  beyond 
the  reach  of  the  combination,  or  the  loss  of  acquired  skill 
involved  in  change  of  work:  but  so  far  as  the  employers  are 
interested  in  the  future  returns  of  their  industrj’,  they  will 
further  avoid  reducing  wages  so  low  as  to  drive  the  rising 
generation  to  other  employments.  In  proportion,  however,  as 
the  habits  of  the  labourers,  or  the  limitations  of  their  intelli- 
gence or  of  their  resources,  operate  as  a bar  to  change  of  place 
or  employment,  the  limit  of  the  employers’  possible  gains  through 
combination  is  obviously  extended ; since,  supposing  such 
change  excluded,  this  limit  would  only  be  fixed,  so  far  as  the 
present  supply  of  labour  alone  is  concerned,  by  the  amount  of 
necessaries  required  to  keep  the  labourers  in  fair  working  con- 
dition*; while  so  far  as  future  supply  is  taken  into  account,  it 
would  similarly  be  fixed  by  the  rate  of  real  wages  which  will 
enable  and  induce  the  labourers  to  rear  a sufficient  supply  of 
future  labourers. 

So  far  we  have  supposed  that  the  monopoly,  whether  of 
sellers  or  of  buyers,  is  not  met  by  a counter-monopoly.  But 


both  to  the  producers  from  whom  they  purchase  and  to  the  persons  to  whom 
they  sell. 

* “Fair  working  condition”  is  a somewhat  vague  phrase;  but  it  is  rather 
difficult  to  say  how  far  an  employer’s  self-interest  will  prompt  him  to  add  to  his 
labourers’  wages,  when  such  additions,  if  properly  spent,  would  increase  the 
efficiency  of  the  labourers  themselves  or  of  their  children.  If  the  employer  could 
make  sure  that  the  extra  wages  would  be  properly  spent,  and  that  he  would  be 
able  to  purchase  at  his  own  price  the  improved  labour,  self-interest  would 
obviously  prompt  him  to  give  his  labourers  such  wages  as  would  make  the 
excess  of  value  of  the  results  of  their  labour  over  what  they  consume  (allowing 
for  interest  on  the  latter)  as  great  as  possible.  But  it  will  be  only  under  special 
circumstances  that  he  can  feel  even  approximately  sure  on  these  points.  See 
c.  viii.  § 1. 


CHAP.  X 


MONOPOLY  AND  COMBINATION 


345 


when  an  advantageous  monopoly  of  either  kind  has  been  brought 
about  by  combination,  it  is  primd  facie  the  interest  of  the 
other  parties  to  the  exchanges  in  question  to  form,  if  possible,  a 
counter-combination.  In  this  case  the  determination  of  the 
ratio  of  exchange  between  the  two  monopolies  becomes  an 
entirely  different  question,  only  partially  within  the  range  of 
economic  science.  Accordingly  I defer  the  consideration  of  it 
till  we  have  more  completely  examined  the  effects  of  one-sided 
monopoly. 

§ 3.  The  points  that  we  have  hitherto  discussed  are  such  as 
belong  to  monopoly  generally,  when  considered  from  an  abstract 
point  of  vie\v ; though  in  practice  some  of  them  are  not  likely 
to  arise,  except  in  the  case  of  combinations.  Let  us  now  pass 
to  consider  some  characteristics  that  are  theoretically  found  only 
in  this  latter  case. 

In  the  first  place,  it  is  important  to  observe  that  a com- 
bination, however  effectively  it  may  restrict  the  supply  of  the 
commodity  monopolised,  will  yet  not  be  able  to  count  on  main- 
taining permanently  the  average  earnings  of  the  members  of 
the  combination  perceptibly  above  the  average  earnings  ob- 
tainable by  persons  of  the  same  industrial  grade  in  other 
employments  imposing  no  greater  sacrifices  and  requiring  no 
scarcer  qualifications,  unless  the  number  of  the  combining 
persons  is  also  limited  artificially.  If  entrance  to  the  com- 
bination is  left  perfectly  free,  the  ultimate  effect  of  limiting  the 
supply  of  the  monopolised  commodity  will  tend  to  be  only  a 
change  in  the  mode  in  which  competition  may  be  expected  to 
reduce  the  earnings  of  the  combining  persons ; instead  of 
bringing  down  prices,  competition  will  in  this  case  merely  tend 
to  decrease  the  average  amount  of  business  or  employment 
that  the  combining  persons  are  able  to  obtain. 

Secondly,  we  have  to  take  note  of  the  various  ways  in  which 
the  interests  of  the  combiners  in  the  aggregate  may  be  related 
to  the  private  interests  of  individuals  among  them.  From  the 
point  of  view  of  general  theory.  Combination  presents  itself 
primarily  as  a consequence  of  the  unconstrained  pursuit  of 
private  pecuniary  interest  by  each  individual  who  combines  ; 
but  even  where  this  is  the  case,  and  where  each  may  expect  to 
gain  if  all  keep  their  compact  to  restrict  supply,  the  share  of 
the  gain  of  the  monopoly  accruing  to  any  one  member  of  the 


346 


POLITICAL  ECONOMY 


BOOK  II 


combination  within  a given  period  may  be  materially  less  than 
what  he  might  obtain  by  increasing  his  own  supply  in  violation 
of  the  compact ; especially  if  such  violation  can  be  kept  for 
some  time  secret.  In  such  cases  it  may  be  necessary  for  the 
combination  not  only  to  provide  against  open  violation  of  its 
rules  by  substantial  pecuniary  penalties,  or  strong  social  sanc- 
tions ; but  also  to  take  precautions  against  secret  evasion  of 
rules.  And  such  provision  will,  of  course,  have  to  be  still  more 
stringent,  when — as  is  often  the  case  in  practice — the  com- 
bination generally  profitable  to  a given  class  of  labourers  has 
been  only  joined  reluctantly  by  some  individual  members  of 
the  class ; either  (1)  because  they  have  special  reason  to  dread 
the  initial  loss  caused  by  the  artificial  restriction  of  supply 
or  the  sacrifices  which  a struggle  between  opposing  combinations 
would  entail ; or  (2)  because  the  regulations  necessary  to  ensure 
the  carrying  out  of  the  combination — of  which  I shall  speak 
presently — are  specially  disadvantageous  to  them. 

The  consideration  of  social  sanctions  for  the  maintenance 
of  a combined  monopoly  leads  me  to  observe  that  besides  the 
express  combinations  which  we  have  hitherto  had  in  view,  in 
which  resolutions  are  formally  taken  by  a whole  body  of  com- 
bining persons  or  by  a council  representing  and  obeyed  by  the 
whole  body,  similar  results  may  be  to  some  extent  produced 
by  more  informal  communications ; or  even  without  any  com- 
munication, through  the  acquaintance  that  each  member  of  the 
class  has  with  the  sentiments  and  habits  of  action  of  the  rest. 
Such  tacit  combinations,  indeed,  are  hardly  likely  to  be  effec- 
tive for  the  attainment  of  a rise  in  the  price  of  the  commodity 
exchanged ; except,  perhaps,  where  such  a general  rise  is  ob- 
viously necessary  to  prevent  a definite  loss  to  the  whole  class, 
in  consequence  of  some  change  of  circumstances.  But  where 
the  price  of  any  product  or  seiudce  has  acquired  a certain 
stability  through  custom,  the  resistance  which  the  mere  vis 
inei'tiae  of  custom  would  present  to  any  economic  forces  opera- 
ting to  lower  such  price  is  likely  to  be  considerably  strengthened 
by  the  consciousness  of  each  seller  of  the  commodity  that  other 
sellers  will  recognise  their  common  interest  in  maintaining  the 
price,  and  that  substantial  social  penalties  are  likely  to  be 
inflicted  upon  any  one  who  undersells  the  rest.  It  is  in  this 
way,  for  instance,  that  the  customary  fees  for  professional 


CHAP.  X 


MONOPOLY  AND  COMBINATION 


347 


services,  and  the  prices  charged  by  retail  traders,  are  sometimes 
maintained  above  the  rate  to  which  a perfectly  open  competition 
would  reduce  themh 

In  order  to  see  more  fully  the  effects  of  this  necessity  of 
imposing  sanctions  for  the  maintenance  of  monopoly  resulting 
from  combination,  let  us  examine  more  in  detail  the  steps 
which  the  holder  of  a monopoly  will  h^ve  to  take,  in  order  to 
realise  the  maximum  of  possible  gain.  When  the  monopoly  is 
complete,  it  obviously  confers  the  power  of  fixing  exactly  both 
the  amount  and  the  price  of  the  commodity  supplied  within 
any  given  time.  But  from  the  difficulty  of  forecasting  the 
demand  exactly,  it  can  rarely  be  most  profitable  to  do  this — 
except  for  very  short  periods,  determined  by  the  custom  of  the 
trade  and  the  convenience  of  purchasers.  And  such  a course 
will  generally  be  still  less  expedient,  where  the  monopolist  has 
not  complete  control  of  the  market.  Thus  an  individual  mono- 
polist who  wishes  to  approximate  as  nearly  as  is  practicable  to 
the  possible  maximum  of  gain,  will  in  most  cases  find  it  best  to 
leave  the  actual  total  of  his  receipts  to  be  determined  within 
certain  limits  by  the  demand;  either  (1)  fixing  the  price  and 
letting  the  amount  sold  vary  with  the  state  of  the  market,  or  (2) 
fixing  the  amount  to  be  sold  and  letting  the  price  vary — so  long 
as  the  variations  are  not  very  great.  Which  of  the  two  courses 
he  will  adopt  will  depend  a good  deal  on  the  nature  of  his  busi- 
ness ; which  may  be  such  as  to  render  either  frequent  changes 
in  amount  supplied,  or  frequent  changes  in  price,  especially 
inconvenient.  But  ceteris  paribus  he  will  probably  prefer  to 
effect  the  limitation  of  his  supply  indirectly,  by  keeping  up  the 
price,  so  that  the  sacrifice  of  his  customers’  interests  to  his  own 
may  be  less  palpable  and  offensive.  When,  however,  the  mono- 
poly results  from  combination,  another  consideration  may  some- 
times determine  the  choice  between  the  two  alternatives;  namely, 
the  respective  facilities  that  either  affords  for  practically  holding 

1 The  actnal  extent  of  the  operation  of  these  unavowed,  and  more  or  less 
tacit,  combinations  is,  from  the  nature  of  the  case,  very  difficult  to  ascertain. 
Hence  the  mistake  may  easily  be  made  of  attributing  to  “free  competition”  un- 
favourable effects  on  wages  which  are  really  due  to  combinations  of  this  kind  on 
the  part  of  employers.  And  I am  inclined  to  think  that  this  mistake  has  some- 
times been  made  by  students  of  economic  history,  in  dealing  with  states  of 
society  in  which  custom  has  ceased  to  determine  wages,  while  yet  manual 
labourers  generally  have  not  learnt  to  combine. 


348 


POLITICAL  ECONOMY 


BOOK  ri 


individual  meinbers  of  the  combination  to  their  compact.  An 
agreement  as  to  price  would  seem  to  be  ordinarily  both  the 
simplest  and  the  easiest  to  enforce.  In  some  cases,  however, 
though  a direct  reduction  of  price  is  easy  to  detect  and  pro- 
hibit, it  is  more  difficult  to  secure  that  none  of  the  combining 
suppliers  shall  attract  customers  by  indirect  concessions,  equi- 
valent to  a reduction  'f  price.  On  these  and  other  grounds 
it  has  sometimes  been  iound  more  effective  to  limit  the  amount 
supplied  by  each  seller,  leaving  the  price  to  be  regulated  by  the 
demands 

The  method  by  which  Trades-Unions,  and  other  combina  - 
tions of  labourers,  have  endeavoured  to  increase  the  earnings  of 
their  members  has  been  mainly  that  of  fixing  a price  for  their 
labour.  To  a smaller  extent,  however,  they  have  also  adopted 
measures  tending  to  restrict  the  amount  of  the  labour  that  they 
control.  Thus  (1)  they  have  sought  to  impose  restrictions  on 
the  number  of  apprentices  taken  on  by  the  employers,  and 
(2)  they  have  aimed  at  reducing  the  ordinary  amount  of  hours 
of  each  week’s  (or  day’s)  work  of  the  labourers ; such  reduction, 
however,  has  in  some  cases  been  not  much  more  than  a parti- 
cular mode  of  fixing  the  price  of  labour,  as  there  has  been  no 
regulation  prohibiting  work  beyond  the  normal  time,  and  such 
work  has  in  fact  been  common.  In  any  case  it  is  evident  that 
a Union  open  to  all  properly  qualified  workmen  in  any  trade 
must  in  some  way  limit  the  number  of  those  entering  the 
trade,  in  order  to  secure  permanently  for  its  average  members 
wages  known  to  be  higher  on  the  whole  than  those  earned  in 
similar  industries  of  the  same  grade.  Otherwise,  though  the 
rate  of  wages  paid  to  any  one  in  actual  emplojunent  might  be 
maintained,  the  average  wages  earned  fi-om  year  to  year  would 
tend  to  be  gradually  reduced  by  an  increase  in  the  number  of 
workmen  out  of  employment,  until  the  advantages  of  the  higher 
price  of  labour  were  lost^ 

1 Thus,  for  instance,  “great  coal  companies have  at  various  times  bound 

themselves  to  one  another  under  pecuniary  penalties  not  to  exceed  a certain  out- 
put, which  is  fixed  from  time  to  time  by  a central  committee”  (Economics  of 
Industry, 'ip.  182). 

- It  may  be  observed  that  actually  Trades-Unions  are  not  merely  associations 
for  procuring  to  their  members  the  highest  possible  return  for  their  labour,  but 
also  aim  at  providing  mutual  assurance  for  their  members  by  means  of  pecu- 
niary assistance,  against  the  loss  caused  by  want  of  employment.  The  “out  of 


CHAP.  X 


MONOPOLY  AND  COMBINATION 


349 


Hitherto  we  have  not  expressly  considered  the  case  of  several 
products  different  in  quality,  under  the  control  of  the  same 
monopolist.  Where  such  differences  are  clearly  defined,  this 
plurality  does  not  present  any  new  economic  problem,  as  the 
monopoly  value  of  each  separate  quality  of  product  may  ob- 
viously be  determined  separately.  But,  in  the  case  of  labour, 
differences  of  quality  are  frequently  not  marked  off  by  such 
definite  and  unmistakeable  characteristics  as  would  render  it 
easy  to  frame  a.  tariff  of  wages  accurately  corresponding  to 
them ; and  especially  where  the  processes  of  work  performed 
are  the  same,  and  only  the  manner  of  performing  them  varies, 
it  would  be  very  difficult  for  an  aggregate  of  workers  varying 
in  efficiency  to  agree  upon  such  a tariff.  One  way  out  of  this 
difficulty,  which  is  that  commonly  taken  by  Trades-Unions, 
is  to  fix  a minimum  rate,  below  which  the  ordinarily  skilled 
craftsmen  in  the  trade-  are  not  to  accept  employments 

§ 4.  Let  us  now  inquire  under  what  conditions  of  supply 
and  demand  it  will  be  possible  for  a combination  of  labourers 
to  raise  their  average  earnings  by  an  opportune  increase  of  the 
price  charged  for  their  labour.  In  this  inquiry,  however,  I do 
not  propose  to  take  into  account  the  loss  that  may  be  incurred 
through  strikes,  or  any  expense  involved  in  carrying  on  the 
work  of  combination:  since  it  can  hardly  be  the  interest  of 
employers  to  run  the  risk  of  a strike,  unless  either  they 
combine,  or  a single  business  is  so  large  relatively  to  the  par- 
ticular combination  of  labourers  as  to  enjoy  a partial  “ buyers’ 


“work  pay”  thus  provided  is,  however,  considerably  less  than  the  lowest  wages 
earned  by  an  ordinary  worker  in  the  trade.  Hence  any  addition  to  annual 
wages  secured  by  such  a Union,  if  admission  to  the  trade  were  practically  unre- 
stricted, would  be  liable  to  be  diminished  in  two  ways;  partly  by  the  increased 
contribution  that  would  be  required  from  all  members,  to  insure  effectively 
against  want  of  employment ; and  partly  by  the  increased  number  of  days 
during  which  each  workman,  on  the  average,  would  have  to  content  himself 
with  the  out  of  work  pay.  If,  as  I am  informed,  no  such  effects  as  these 
have  been  observed  in  the  case  of  Trades-Unions  which  do  not  practically 
restrict  entrance  into  their  trades,  I should  be  disposed  to  infer  that  no  such 
Union  has  as  yet  raised  the  net  advantages  obtainable  by  its  members  above 
those  obtainable  in  other  industries  that  are  on  the  same  level  as  regards 
the  outlay  and  the  natural  qualifications  which  they  require — or  at  least 
that  it  has  not  done  this  to  an  extent  generally  perceptible  for  any  considerable, 
period. 

1 This  rate  is  frequently  different  in  different  localities.  Cf.  Howell,  Capital 
and  Labour,  c.  iv.  § 40. 


350 


POLITICAL  ECONOMY 


BOOK  II 


“ monopoly  ” ; and  we  have  not  yet  come  to  consider  the  terms 
of  exchange  between  two  opposing  monopolies. 

Putting  strikes,  then,  out  of  the  question,  we  may  say 
generally  that  the  combining  labourers  will  gain  by  raising  the 
rate  at  which  they  consent  to  sell  their  labour,  so  long  ais  this 
does  not  cause  the  demand  for  their  labour  to  fall  off  so  much 
as  to  reduce  the  total  amount  spent  in  purchasing  it.  Such 
a fall  in  demand  may  (1)  be  expected  to  occur  rapidly,  if  an 
adequate  substitute  for  the  monopolised  labour  can  be  obtained 
from  other  sources,  at  a cheaper  rate  (all  things  considered) 
than  that  fixed  by  the  Union : this  contingency,  however,  it 
will  be  not  difficult  to  exclude  temporarily,  if  the  combination 
comprises  the  majority,  or  even  a large  minority,  of  the  labourers 
in  the  country,  trained  to  perform  the  processes  of  the  particular 
industry : provided  the  rise  in  wages  demanded  be  kept  within 
such  limits  that  the  labour  controlled  by  the  Union  is  still 
cheaper,  considering  its  superior  quality,  than  any  other  labour 
which  the  employers  are  able  to  draw  from  other  industries,  or 
import  from  other  countries’.  But  (2)  even  if  this  contingency 
be  excluded,  the  fall  in  the  demand  for  the  monopolised  labour 
may  be  expected  to  occur,  though  more  gradually,  through  the 
defection  of  employers,  if  the  average  profits  of  the  latter  are 
reduced  by  the  rise  in  wages  perceptibly  below  the  profits 
obtainable  on  equal  amounts  of  capital  in  other  industries. 
There  are,  however,  several  cases  in  which  this  effect  is, 
either  permanently  or  temporarily,  unlikely  to  occur  to  any 
important  extent:  as  (a)  if  the  employers,  being  wholly  or 
partially  exempt  from  competition,  were  preUously  able  to 
make  profits  in  excess  of  the  normal  rate ; or  (6)  if,  apart  from 
the  rise  in  wages,  they  would  be  in  a position  to  do  so  tem- 
porarily owing  to  a simultaneous  rise  in  the  price  of  their 
commodity  through  intensification  of  the  demand,  or  to  a fall 
in  its  cost  of  production  through  invention,  cheapening  of 

1 In  the  case  of  labour  imported  from  (nominally)  the  same  industry  in  other 
countries  we  have  to  consider  not  merely  the  actual  cost  of  carriage,  the  expense 
incurred  in  procuring  the  labourers  by  advertisements,  agents,  &c.,  and  the  extra 
remuneration  required  to  compensate  for  expatriation  ; but  also  the  extent  to  which 
they  will  be  inexpert  in  the  methods  and  processes  of  the  industry  as  practised  in 
the  country  to  which  they  are  brought ; and  further,  where  the  languages  are 
different,  the  cost  of  interpreters,  and  the  loss  occasioned  bj’  inevitable  misun- 
derstandings on  the  part  of  fellow-labourers  and  others.  Cf.  Howell,  c.  ix.  § 13. 


CHAP.  X 


MONOPOLY  AND  COMBINATION 


351 


material,  &c.  It  is  to  be  observed  that  in  the  latter  cases, 
an  ultimate  rise  in  wages  might  be  expected  to  occur,  even 
if  there  were  no  combination  of  labourers;  since  the  increase 
in  employers’  profits  that  would  then  take  place  would  tend 
to  cause  an  extension  of  business  and  an  intensified  demand 
for  the  appropriate  labour.  Still,  the  gain  that  would  thus 
accrue  to  the  labourers  might  easily  be  less  on  the  whole 
(as  well  as  later  in  time)  than  the  increase  in  wages  obtain- 
able by  combination. 

Again,  if  the  commodity  sold  by  the  employers  is  of  such 
a kind  that  an  increase  in  its  price  tends  but  slightly  to  reduce 
the  consumers’  demand  for  it,  so  that  the  aggregate  expenditure 
on  the  commodity  is  increased,  the  additional  cost  of  production 
due  to  a rise  in  wages  may  be  entirely  thrown  on  the  consumers, 
without  any  material  reduction  in  the  amount  produced,  or  in 
the  employers’  demand  for  labour.  And  this  is  likely  to  be  the 
case  with  any  commodities  which  are  regarded  by  the  consumers 
as  indispensable,  except  so  far  as  the  employers  of  the  com- 
bining labourers  are  closely  pressed  in  the  markets  which  they 
supply  by  the  competition  of  producers  who  are  unaffected  by 
the  combination. 

Further,  a rise  in  wages  may  often  be  temporarily  secured, 
without  a corresponding  reduction  of  business,  even  though  the 
employers’  profits  be  thereby  reduced  considerably  below  the 
normal  rate,  if  their  industry  is  one  that  uses  a large  amount  of 
fixed  capital.  For  in  this  case  the  employers  are  often  unable 
to  diminish  their  employment  of  labour  materially,  without 
proportionally  reducing  the  yield  on  their  fixed  capital : and 
the  loss  thus  incurred  may  be  greater  than  that  involved  in 
paying  the  higher  wages  to  their  full  complement  of  labourers. 
Indeed,  in  certain  circumstances — as  for  instance,  if  an  employer 
has  contracted  to  do  a certain  amount  of  work  under  heavy 
penalties,  or  if  he  has  a large  stock  of  raw  material  that  will 
deteriorate  by  being  kept,  or  even  merely  if  he  is  seriously 
afraid  of  losing  his  business  connexion — it  may  be  expedient 
for  him  to  continue  his  production,  even  if  he  earns  less  than 
nothing  for  his  labour  and  the  use  of  his  capital.  But  under 
such  circumstances  the  gain  to  the  combining  labourers  can 
obviously  be  only  temporary,  the  period  during  which  it  can  last 
being  limited  in  proportion  to  the  severity  of  the  employers’ 


352 


POLITICAL  ECONOMY 


BOOK  II 


loss : and  it  is  not  improbable  that  the  ultimate  loss  to  the 
combining  labourers  from  the  diminution  of  employment  may 
decidedly  outweigh  the  immediate  gain. 

In  all  the  above  cases  it  is  possible  for  a combination  of 
workmen  to  secure,  either  temporarily  or  permanently,  a rise  in 
wages ; while  in  none  of  them,  except  the  last,  has  such  gain 
any  manifest  tendency  to  be  counterbalanced  by  future  loss. 
And  it  does  not  appear  that  these  cases  are  in  practice  very 
exceptional ; or  that  the  proposition  that  a Trade-Union  “cannot 
“ in  the  long  run  succeed  in  raising  wages”  corresponds  even 
approximately  to  the  actual  facts  of  industr}^  I am  not,  how- 
ever, aware  that  any  economist  of  repute  has  really  maintained 
such  a proposition — whatever  may  be  the  case  with  indiscreet 
disciples.  All  that  Mill  and  his  chief  followers  have  argued 
is,  that  if  one  set  of  labourers  obtain  an  increase  of  wages  in 
this  way,  there  must  be  a corresponding  reduction  in  the  wages 
of  other  labourers.  Even  if  this  were  so,  there  hardly  seems 
to  be  any  reason  why  the  labourers  in  any  particular  industr}', 
supposing  them  to  be  “ economic  men  ” of  the  ordinarj*  pattern, 
should  be  expected  to  sacrifice  their  interests  to  those  of  certain 
other  labourei’S  unkno'vvn.  Still  the  conclusion,  fi’om  the  point 
of  view  of  the  philanthropist,  is  so  important  that  it  is  worth 
while  to  examine  carefully  the  grounds  upon  which  it  is  based. 

The  doctrine  is,  in  fact,  a deduction  from  ^that  combated  in 
chapter  vin.,  under  the  name  of  the  “Wages-Fund  Theory,” 
according  to  which  the  share  of  hired  labour  in  the  aggregate 
was  supposed  to  be  “predetermined”  in  the  aggregate  bargaining 
between  (employing)  capitalists  and  labourers,  and  therefore  as 
incapable  of  being  altered  by  the  successful  bargaining  of  any 
one  set  of  labourers.  According  to  my  view  of  the  relation  of 
capital  to  labour,  this  supposition  is  erroneous.  We  can,  indeed, 
affinn  that  any  increase  in  the  wages  of  hired  labour,  not 
accompanied  by  an  equal  increase  in  its  productiveness,  tends 
to  be  compensated  to  some  extent  by  a subsequent  decrease,  so 
far  as  it  involves  a reduction  of  the  rate  of  interest  in  the 
country;  since  any  such  reduction  must  tend  to  check  the 
supply  of  capital  for  home  investment,  and  so  ultimately  to 
raise  interest  again,  at  the  expense  of  wages.  But  there  is  no 
reason  to  suppose  that  this  ulterior  loss  to  hired  labourers  in  the 
aggregate  will  just  counterbalance  their  previous  gain;  and 


CHAP.  X 


MONOPOLY  AND  COMBINATION 


353 


there  are  se^■el•al  possible  cases  in  which  the  above-mentioned 
effect  on  interest  will  either  not  occur  at  all,  or  be  slight  in 
comparison  to  the  rise  in  wages.  Thus,  in  the  first  place,  when 
the  increase  in  the  remuneration  of  any  class  of  labourers  causes 
a corresponding  increase  in  their  efficiency,  through  their  being 
more  amply  supplied  with  the  necessaries  of  life,  the  gain  of 
these  labourere  involves  no  corresponding  loss  to  any  other 
class.  Again,  so  far  tis  any  rise  in  wages  diminishes  the  extra 
profits  which  a particular  class  of  employers,  having  certain 
special  advantages,  were  previously  able  to  make,  the  loss 
caused  by  it  falls  primarily  on  the  wages  of  management  of 
these  employers ; and  whatever  ultimate  effect  it  may  have  in 
reducing  the  rate  of  interest  is  not  likely  to  be  great  in  propor- 
tion to  its  primary  effect.  Finally,  so  far  as  the  addition  to 
particular  wages  is  entirely  or  mainly  paid  by  an  increase  in 
the  exchange  value  of  products  consumed  chiefly  by  the  rich, 
though  there  will  be  a consequent  loss  to  capitalists  as  con- 
sumers, and  thus  a diminution  in  the  real  income  derived  from 
capital,  there  will  not,  therefore,  be  any  diminution  in  interest 
regarded  as  a motive  to  accumulation. 

In  none  of  these  cases,  then,  does  a gain  obtained  through 
combination  by  one  set  of  hired  labourers  tend  to  cause  any- 
thing like  an  equivalent  loss  to  some  other  hired  labourers. 
There  are,  no  doubt,  many  other  cases  in  which  such  loss  tends 
to  be  ultimately  considerable,  and  may  outweigh  the  imme- 
diate gain,  from  the  point  of  view  of  labour  generally,  even  if 
we  leave  the  effect  of  strikes  out  of  account.  The  loss  in 
question  is  produced  not  only  through  reduction  of  the  supply 
of  capital  for  home  employment,  but  also  in  other  ways ; thus 
(1)  an  increase  in  the  cost  of  any  particular  kind  of  labour,  so 
far  as  it  causes  a rise  in  the  price  of  products  consumed  by 
other  hired  labourers,  tends  to  diminish  the  real  wages  of  the 
latter ; (2)  a rise  due  to  combination  in  the  price  of  the  labour 
furnished  by  a particular  class  of  woi'kers  will  generally  be 
accompanied  by  a diminution  in  the  amount  of  such  laboi^' 
employed,  and  so  will  tend  pro  tanto  to  prevent  some  actual  or 
possible  labourers  of  the  same  class  from  obtaining  as  much 
remuneration  as  they  would  otherwise  do ; (3)  the  same  cause 
tends  more  indirectly  to  reduce  the  demand  for  other  kinds 
of  labour  employed  either  in  the  same  industiy,  or  in  other 

23 


S.  P.  E. 


354 


POLITICAL  ECONOMY 


BOOK  II 


industries  co-operating  directly  or  indirectly  to  produce  the 
same  consumable  product. 

So  far  I have  been  considering  the  operation  of  Trades- 
Unions,  or  other  combinations  of  labourers,  in  restricting  the 
supply  of  labour  either  directly  or  by  raising  its  price.  But, 
before  concluding  this  inquiry,  it  should  be  observ^ed  that 
combinations  of  workers,  avowed  or  tacit,  have  sometimes 
sought  with  more  or  less  success  to  increase  their  earnings 
through  an  enlargement  of  the  demand  for  their  work ; 
by  enforcing  the  use  of  more  laborious  processes  of  production 
than  are  necessary  for  the  result  desired  by  the  consumei’s  of 
their  products.  Such  artificial  enlargement  of  demand  is  more 
obviously  injurious  to  society  than  an  artificial  restriction  of 
supply ; since  the  extra  labour  of  which  the  use  is  thus  enforced 
is,  from,  a social  point  of  view,  palpably  and  undeniably  wasted. 
Hence  this  mode  of  increasing  the  aggregate  wages  of  a class 
of  workers  seems  to  be  rarely  adopted  in  an  avowed  and  un- 
qualified way:  that  is,  the  more  laborious  process  maintained 
by  combination  commonly  produces,  or  is  believed  to  produce, 
a result  somewhat  superior  in  quality  to  that  which  could  be 
obtained  by  less  labour,  though  the  difference  in  quality  by  no 
means  compensates  for  the  additional  cost. 

§ 5.  In  the  last  two  sections  we  have  been  engaged  in 
analysing  the  effects  of  monopoly  resulting  from  combination, 
when  it  is  what  I have  called  “one-sided”;  i.e.,  Avhen  it  is  not 
met  by  a counter-combination  of  the  other  parties  to  the 
exchanges  in  question.  But — as  I have  said — where  combina- 
tion on  one  side  gives  the  combiners  important  advantages  in 
bargaining,  at  the  expense  of  those  who  deal  with  them,  self- 
interest  vdll  obviously  suggest  to  the  latter  a counter-combina- 
tion; as  a means  of  escape  from  their  unfavourable  position.  The 
question  then  arises,  as  to  the  terms  on  which  exchange  will  tend 
to  take  place  when  monopoly  thus  meets  monopoly,  assuming  (as 
we  have  assumed  throughout)  that  the  action  of  either  paity  is 
governed  by  a single-minded  but  intelligent  regard  to  its  own 
interests.  I do  not  think  that  a definite  theoretical  answer  can 
be  given  to  this  question — at  least  according  to  the  method 
adopted  in  the  present  Book — if,  as  will  usually  be  the  case, 
there  is  a considerable  margin  between  the  least  favourable 
rates  of  exchange  that  it  would  be  the  interest  of  each  side 


CHAP.  X 


MONOPOLY  AND  COMBINATION 


356 


respectively  to  accept,  if  necessary,  rather  than  not  come  to 
terms.  We  can  say  that  under  these  conditions  it  is  clearly  the 
interest  of  both  to  divide  this  margin  in  any  proportion,  rather 
than  not  effect  an  exchange : but  there  are  no  general  economic 
considerations  that  enable  us  to  say  what  proportion  would  be 
chosen.  Similarly  we  cannot  say  to  what  extent  or  for  how 
long  it  is  the  interest  of  either  side  to  suffer  loss  or  incon- 
venience rather  than  accept  the  terms  offered  by  the  other 
party.  It  is  a trial  of  endurance,  of  which  the  results  are  likely 
to  vary  according  to  the  financial  and  other  circumstances  of 
the  contending  parties. 

It  is,  therefore,  only  in  a partial  and  subordinate  way  that 
Economic  Science  can  offer  assistance  in  dealing  with  the  prac- 
tical problem  presented  to  Boards  of  Conciliation  or  Courts  of 
Arbitration  when  they  attempt  to  avert  or  close  a controvemy 
between  employers  and  employed  in  any  industry  as  to  the  rate 
of  wages.  Economic  science  cannot  profess  to  determine  the 
normal  division  of  the  difference  remaining,  when  from  the  net 
produce  available  for  wages  and  profits  in  any  branch  of  pro- 
duction we  subtract  the  minimum  shares  which  it  is  the  interest 
of  employers  and  employed  respectively  to  take  rather  than 
abandon  the  business  and  seek  employment  for  their  labour  and 
capital  elsewhere.  All  that  it  can  do  is  to  guard  against 
mistakes  in  applying  any  principle  of  distribution  of  the  net 
produce  on  which  the  two  parties  may  agree:  it  can  make  clear 
what  elements  of  gain  or  loss  are  to  be  taken  into  account 
in  carrying  out  this  principle  in  varying  circumstances,  and 
what  weight  is  to  be  attached  to  each  element.  But  the 
establishment  of  the  principle  itself  lies  beyond  the  scope  of 
economic  science,  as  conceived  by  the  present  writer.  I there- 
fore defer  the  detailed  discussion  of  this  practically  most  im- 
portant problem,  until,  in  the  concluding  Book,  I pass  from 
discussing  Distribution  as  it  is  or  tends  to  be  to  consider 
Distribution  as  it  ought  to  be. 


CHAPTER  XL 


TRANSIENT  AND  LOCAL  VARIATIONS  IN  DISTRIBUTION. 

§ 1.  The  more  important  conclusions  reached  in  the  five 
preceding  chapters  may  be  broadly  summed  up  as  follows. 

The  whole  produce  of  the  labour  and  capital  employed  in 
any  country',  the  whole  increment  of  its  wealth  in  any  given 
year,  will  be  greater  or  less — other  things  being  the  same — 
according  to  the  quantity  and  efficiency  of  its  labour : while  the 
supply  of  labour,  in  a thickly  peopled  country,  will  be  materially 
influenced  by  the  amount  of  produce  per  head  that  falls  to  the 
labourei’s ; and  again  the  efficiency  of  the  labour  will  depend 
largely  on  the  amount  of  aid  that  it  receives  from  capital,  the 
accumulation  of  which  is  materially  influenced  by  the  rate  of 
interest.  The  earnings  of  labour  in  the  aggregate  (including 
the  labour  of  management)  may  be  most  conveniently  regarded 
as  consisting  of  this  total  jiroduce,  after  subtracting  whatever 
payment  has  to  be  made  for  the  use  of  the  accumulated  results 
of  previous  labour  and  appropriated  natural  agents.  Industrial 
competition  operates  continually,  with  certain  qualifications  and 
within  certain  limits,  to  equalise  the  shares  in  which  such 
aggregate  earnings  of  labour  are  dirtded  among  the  labourers ; 
still,  the  wages  of  different  classes  are  characterised  by  very- 
striking  inequalities  \yhich  industrial  competition  has  no  direct 
tendency  to  remove.  These  inequalities  are  partly  compensa- 
tory for  inequalities  of  sacrifice  or  outlay  undergone  either  by 
the  workers  themselves  or  their  parents ; but,  in  such  a society 
as  ours,  they  are  likely  to  be  partly  due  to  the  scarcity  of 
persons  duly  qualified,  through  their  own  wealth  or  their 
parents’,  for  the  performance  of  certain  kinds  of  work.  The 


CHAP.  XI 


VARIATIONS  IN  DISTRIBUTION 


357 


limitation  of  numbers  necessary  to  this  result  would  not, 
however,  be  maintained,  generally  speaking,  if  the  standard  of 
comfort  habitual  in  each  of  the  higher  grades  of  society  did  not 
place  an  effective  check  upon  increase  of  population  within  the 
grade.  This  check,  moreover,  may  be  importantly  aided  by 
the  attractions  which  the  prospects  of  higher  remuneration 
abroad  exercise  on  different  classes  of  labourers ; since  the 
average  real  remuneration  of  any  class  can  not  remain  below 
the  real  remuneration  which  the  workers  in  question  believe  to 
be  obtainable  by  them  in  another  country,  by  an  amount 
materially  more  than  sufficient  to  compensate  for  the  pro- 
spective cost  and  trouble  of  obtaining  it,  and  the  sacrifices 
involved  in  expatriation,  as  estimated  by  the  persons  concerned; 
provided  that  the  outlay  required  is  not  actually  beyond  their 
means. 

Another  cause  of  variation  in  the  wages  of  different  kinds  of 
labour  is  the  fact  that  certain  classes  of  persons  possess  natural 
qualities,  physical  and  intellectual,  which  are  scarce  relatively 
to  the  demand  for  their  labour;  and  this  is,  even  more  mani- 
festly, a cause  of  differences  of  remuneration  among  individual 
members  of  the  same  class.  Skill  peculiar  to  a single  in- 
dividual renders  its  possessor  a monopolist  of  the  special  com- 
modity produced  by  his  skill ; and  this  monopoly  may  enable 
him  to  increase  his  income  very  considerably,  if  there  be  a 
keen  demand  for  his  commodity.  Similar  advantages,  varying 
in  extent  and  duration,  may  be  gained  by  a combination  of 
persons  specially  skilled.  If  the  labour  controlled  by  such  a 
combination  were  strictly  indispensable  to  the  production  of 
some  strictly  indispensable  commodity,  the  combined  labourers 
would  have  it  in  their  power  to  exact  such  a price  for  it  as 
would  strip  the  rest  of  the  community  of  all  their  superfluous 
wealth — that  is,  if  we  can  suppose  freedom  of  exchange  to  be 
legally  maintained  under  these  hypothetical  circumstances. 
Practically  such  a case  has  never  occurred  : even  where  the 
need  which  the  monopolised  labour  supplies  is  one  which  must 
be  satisfied,  some  substitute  can  always  be  found  either  (1)  for 
the  labour  or  (2)  for  the  consumable  commodity  which  it  is  a 
means  of  producing ; and  this  possibility  of  substitution  fixes  a 
limit  to  the  price  which  the  monopolised  labour  can  obtain. 

A specially  remarkable  instance  of  inequality  in  the  remune- 


358 


POLITICAL  ECONOMY 


BOOK  II 


.ration  of  labour  is  furnished  by  the  earnings  or  wages  of  manage- 
ment of  the  employer  as  such;  since  such  wages  tend  to  increase 
with  the  amount  of  capital  employed  to  an  extent  more  than 
proportioned  to  the  consequent  increase  in  the  labour  of  man- 
agement ; owing  to  the  scarcity  of  employers  individually  con- 
trolling large  capitals,  as  compared  -with  the  field  of  employ- 
ment for  such  capitals,  and  to  the  superiority,  on  the  average, 
of  the  w'ork  done  by  an  employer  who  labours  for  himself  alone, 
as  compared  wdth  the  manager  of  a joint-stock  company. 

Turning  to  the  yield  of  capital  itself,  we  observe  that  the 
returns  from  certain  investments  may  be  kept  above  the  ordinar)' 
rate  of  interest  on  the  original  outlay — ^just  as  the  remuneration 
of  labour  may — through  the  operation  of  monopoly  or  scarcity. 
A chief  case  of  this  is  the  rent  of  agricultural  land  in  thickly 
populated  countries,  which  is  kept  above  ordinar}'  interest  on 
the  outlay  of  which  its  utility  is  the  result,  by  the  limitation  of 
land  equally  available  for  supplying  the  same  markets  with 
agricultural  products : the  excess  of  yield  being  due  partly  to 
the  natural  qualities  of  the  soil,  partly  to  the  distribution  of 
the  population  that  purchases  its  produce.  In  some  cases — such 
as  the  ground  in  towns  or  the  ground  containing  rich  minerals 
(supposing  no  outlay  to  have  been  incurred  in  discovering  them) — 
rent  is  not  to  any  material  extent  paid  for  the  use  of  the  results 
of  labour  employed  on  the  land : it  is  almost  whollv  to  be 
referred  to  the  apjiropriation  of  a natural  agent  scarce  relatively 
to  the  demand  for  it.  The  effect  of  monopoly  or  scarcity 
is  also  exhibited  by  the  high  diridends  often  paid  on  the 
stocks  of  water-companies  and  gas-companies,  and  other  invest- 
ments which,  either  through  legal  interference  or  the  force  of 
circumstances,  are  wholly  or  partially  exempt  from  competition. 
An  analogous  extra  yield,  again,  is  obtained  by  manufac- 
turers who  use  processes  protected  from  imitation  by  secrecy 
or  legal  monopoly,  and  by  houses  of  business  that  have  an 
established  connexion : and  though  such  extra  jirofit  may  be 
properly  regarded  as  interest  on  the  results  of  the  labour  applied 
in  inventing  and  perfecting  a new  process  or  establishing  a 
business,  it  is  often  much  in  excess  of  ordinar}'  interest  on  such 
outlay,  when  the  labour  has  been  applied  under  specially  favour- 
able social  or  industrial  conditions. 

On  the  other  hand,  the  yield  of  capital  fully  exposed  to 


CHLVP.  XI 


VARIATIONS  IN  DISTRIBUTION 


359 


competition,  and  not  capable  of  being  transferred  without  loss 
from  the  investment  in  which  it  has  been  placed,  cannot  on  the 
average  be  higher  than  ordinary  interest  on  the  original  outlay ; 
and  is  liable  to  become  indefinitely  less  than  this,  through 
changes  in  the  arts  of  industry,  or  in  other  social  conditions. 
Nor  is  this  liability  absent,  even  in  the  case  of  capital  partly 
exempt  from  competition. 

Current  interest,  or  the  price  obtained  for  the  use  of  capital 
continually  available  for  new  investment,  tends  to  be  approxi- 
mately the  same  for  equal  amounts  of  such  capital  invested  for 
equal  periods,  allowance  being  made  for  differences  in  the 
security  of  different  investments,  and  in  the  expectations  of 
their  future  rise  and  fall.  Such  interest  is  partly  paid  for 
wealth  employed  in  production,  and  partly  for  consumers’ 
wealth  previously  lent  and  consumed,  either  by  living  indivi- 
duals or  those  whose  obligations  they  inherit,  or  by  the  com- 
munity to  which  they  belong ; in  this  latter  case  the  debts  on 
which  the  interest  is  paid  are  to  be  regarded  as  invested  capital 
of  individuals,  though  not  of  the  community.  The  ratio  of  this 
payment  to  the  value  of  the  principal  is  mainly  determined,  in 
a modern  industrial  community  in  which  wealth  is  continually 
accumulated,  by  the  relation  between  the  supply  of  available 
capital  and  the  field  of  profitable  industrial  employment  for  it ; 
which  latter  tends  to  be  enlarged  as  population  increases — 
though  not  in  proportion  to  such  increase  after  a certain  point 
of  density  has  been  reached — and  which,  in  recent  times 
especially,  has  been  continually  and  greatly  extended  by  the 
progress  of  invention.  Since,  however,  the  accumulation  of 
capital  in  a country  is  influenced  by  the  rate  of  interest, 
it  may  be  assumed  with  great  probability  that  there  is,  at  any 
given  time,  a certain  minimum  rate  necessary  to  induce  saving 
sufficient  to  balance  the  waste  of  capital  that  is  continually 
going  on ; and  that  as  current  interest  sinks  towards  this 
minimum,  accumulation  will  be  more  and  more  retarded.  The 
supply  of  capital  in  a country,  however,  tends  to  vary  from 
many  other  causes  besides  changes  in  the  rate  of  interest  there ; 
in  particular,  owing  to  the  international  mobility  of  capital, 
the  supply  in  any  one  country  tends  to  be  affected  by  any 
material  changes  in  the  field  of  employment  for  capital  else- 
where ; and  also  by  any  change — due  (e.g.)  to  increase  or 


360 


POLITICAL  ECONOMY 


BOOK  11 


decrease  of  mutuaL  confidence — in  the  general  estimate  formed 
in  any  one  country  of  the  risks  attending  investment  in  an- 
other. 

§ 2.  The  rates  of  remuneration  for  different  industrial 
services,  as  they  tend  to  be  determined  by  the  operation  of  the 
general  economic  causes  above  analysed, — except  Combination, 
which  requires  exceptional  treatment  from  the  difficulty  of  fore- 
casting its  effects,  if  we  suppose  it  generally  adopted, — ma)*  be 
designated  as  the  Normal  rates.  At  any  particular  time  and 
place,  the  actual  shares  of  produce  received  by  members  of  the 
different  industrial  classes  ai’e  likely  to  vary  somewfoat  fi-om 
the  normal  shares,  under  the  influence  of  such  transient  or 
local  causes  as  I now  propose  to  examine, — confining  myself 
mainly  to  causes  actually  operative  in  the  most  advanced  in- 
dustrial communities,  and  not  excluded  by  the  general  assump- 
tions on  which  our  theory  has  proceeded.  We  ought,  however, 
to  begin  by  noting  that  the  normal  shares  themselves  are 
likely  to  be  continually  fluctuating;  since  there  is  no  reason 
to  assume  that  any  of  the  general  causes  that  influence  them 
will  operate  in  precisely  the  same  manner  or  degree  for  any 
length  of  time.  We  have  already  observed  that  both  the  total 
produce  of  industry,  and  the  proportions  that  fall  respectively 
to  labour  and  to  capital,  tend  to  be  continually  altered  by 
the  changes  that  constitute  the  normal  growth  of  a prosperous 
community — the  accumulation  of  capital,  the  increase  of  popu- 
lation, improvements  in  the  arts  of  industry  due  to  invention, 
and  the  development  of  co-operation,  especially  co-operation 
through  exchange.  We  have  seen,  too,  that  the  growth  of 
population  within  a given  area  tends,  on  the  one  hand,  to  in- 
crease the  advantages  of  co-operation ; but  that,  on  the  other 
hand,  after  a certain  jjitch  of  density  is  reached,  it  tends'  to 
diminish  the  efficiency  of  labour  in  agriculture,  through  the 
increased  difficulty  of  agricultui’al  production,  and  to  increase 
correspondingly  the  proportion  of  agricultural  produce  which 
falls  to  the  lando^vner  as  such.  Turning  to  the  normal  dis- 
tribution of  the  aggregate  earnings  of  labour  among  the  dif- 
ferent classes  of  workers,  we  can  easih'  see  that  it  will  be 
modified  in  various  complex  ways ; by  changes  in  the  distri- 

' That  is,  the  mere  growth  of  population  has  in  itself  this  tendency;  though 
it  may  be  counteracted  by  improvements  in  industry  and  trade. 


CHAP.  XI 


VARIATIONS  IN  DISTRIBUTION 


361 


bution  of  wealth,  altering  the  supply  of  persons  capable  of 
making  a given  amount  of  outlay;  changes  in  the  processes 
of  industry,  altering  the  demand  both  for  natural  qualities  and 
for  the  results  of  training,  and  also  altering  the  sacrifices  re- 
quired for  the  production  of  certain  utilities;  changes  in  the 
cost  of  production  of  certain  kinds  of  skill,  through  the  spread 
of  education,  &c. ; changes  in  social  habits  and  opinions,  modi- 
fying men’s  estimate  of  commodities  and  of  sacrifices ; and  other 
changes  too  numerous  to  mention. 

Again,  the  continual  oscillations  in  the  market-price  of  com- 
modities which  we  have  noticed  tend  to  be  accompanied  with 
coiTesponding  oscillations  in  the  profits  of  those  who  supply 
the  commodities  in  question ; owing  to  the  inevitably  unstable 
adjustment  of  supply  to  the  generally  varying  demand.  The 
forecast  of  the  demand  for  a commodity — at  any  supposed 
price — can  at  best  be  only  approximative ; though  with  some 
commodities — such  as  a staple  of  food — the  approximation  can 
be  made  much  more  close  than  with  others;  in  most  cases, 
however,  besides  the  larger  alterations  in  demand  which  I shall 
notice  later,  there  will  be  continual  small  tides  of  change  from 
complex  causes  that  defy  calculation.  And  even  supposing  the 
demand  for  any  product  exactly  known  to  all'  suppliers,  it  is 
still  highl}^  unlikely  that  at  any  given  time  supply  should  be  so 
adjusted  as  to  give  the  suppliers  the  exact  remuneration  that 
industrial  competition  tends  to  allot  to  them.  Indeed  in  agri- 
culture, hunting,  and  some  kinds  of  mining  the  produce  obtain- 
able by  a given  amount  of  labour  frequently  varies  very  consi- 
derably on  either  side  of  the  average ; and  it  may  be  remarked 
that,  supposing  such  variations  to  affect  all  producers  about 
equally,  it  depends  on  the  precise  nature  of  the  demand  for  the 
product  whether  an  abundant  supply  will  be  profitable  or  the 
reverse : since  if  the  demand  is  inelastic — as  it  is  {e.g.)  for 
com — the  producers  may  easily  gain  by  dearth  and  lose  by 
plenty. 

Finally,  even  the  larger  fluctuations  that  affect  different 
branches  of  production — which  we  have  now  to  examine  more 
in  detail — have  already  been  noticed  incidentally  in  considering 
the  general  determination  of  interest;  since  we  had  to  distin- 
guish, in  the  returns  actually  received  from  investments  of 
capital,  that  portion  which  is  practically  compensation  for  risk. 


362 


POLITICAL  ECONOMY 


BOOK  II 


Now  it  belongs  to  the  very  notion  of  “ risk  ” that  we  cannot 
predict  when  or  how’  far  the  loss,  of  which  we  recognise  a 
certain  probability,  will  actually  be  incuired ; hence  even  if 
such  expectations  of  risk  were  altogether  well-founded,  it  would 
be  in  the  highest  degree  improbable  that  all  ovmers  of  capital 
should  incur  the  same  proportion  of  loss  in  any  particular  year. 
Similarly  we  have  taken  note  of  “ uncertainty  ” as  one  cause  of 
the  difference  in  the  actual  remunerations  of  labour.  Here, 
however,  it  should  be  observed  that  ordinarily  a much  more 
exact  comparison  of  prospective  remunerations  is  made  b}' 
persons  investing  capital  than  by  persons  selecting  a line  of 
labour.  Very  slight  differences  in  the  prospective  security  of 
interest,  which  would  have  no  effect  on  the  choice  of  a trade 
or  profession,  find  expression  in  the  different  prices  of  different 
investments  of  capital ; thus,  for  instance,  the  faint  additional 
chance  of  the  non-payment  of  interest  on  the  preference  shares 
of  a first-class  English  railway  causes  such  shares  to  be  sold 
at  a somewhat  lower  price  than  debentures  of  the  same  rail- 
way yielding  the  same  interest.  So,  again,  if  a small  capi- 
talist is  considering  whether  he  shall  go  into  a business,  he 
takes  into  account  indefinite  and  remote  risks  which  can  hardly 
enter  into  the  view  of  an  ordinary’  labourer  choosing  a trade  for 
his  son : for  the  uncertainties  of  which  Adam  Smith  speaks, 
that  tend  to  be  compensated  in  the  higher  wages  of  particular 
trades,  are  dangers  frequently  incuiTed  in  the  coui’se  of  the 
ordinary  experience  of  such  trades.  Accordingly  the  exceptional 
losses  of  different  classes  of  capitalists  and  employei-s  tend  to 
be  compensated  by  higher  incomes  in  ordinary  times  to  a 
greater  extent  than  similar  losses  incurred  by  hired  labourers. 
On  the  other  hand,  the  fluctuations  in  the  profits  of  capital 
employed  by  the  owner,  and  even  in  the  mere  interest  of 
capital  that  bears  the  full  risks  of  industry,  are  decidedly 
greater  on  the  average  than  the  fluctuations  in  the  remunera- 
tion of  hired  labour:  because  under  the  existing  conditions  of 
industry  the  capitalist  employer  mostly’  beare  the  first  shock 
of  unforeseen  losses,  and  only  passes  on  a part  of  the  blow  to  his 
employees ; and,  in  the  same  way,  he  mostly  secures  the  lion’s 
share  of  unforeseen  gains. 

§ 3.  Let  us  then  proceed  to  consider  more  in  detail  the 
causes  and  effects  of  the  more  important  fluctuations  in  the 


CHAP.  XI 


VARIATIONS  IN  DISTRIBUTION 


363 


profits  of  different  industries.  Since  the  danger  of  loss  occupies 
a larger  place  in  the  common  view  of  industrial  capital  than 
the  chance  of  extra  gain,  we  may  conveniently  begin  by  directing 
our  attention  to  the  former  phenomenon ; bearing  in  mind  that 
so  far  as  we  are  merely  dealing  with  changes  in  distribution, 
loss  and  gain— to  different  sets  of  persons — are  correlative 
effects  of  the  same  causes*. 

Losses  in  business  which  impair  aggregate  wealth  as  well  as 
the  wealth  of  individuals  may  be  due,  firstly,  to  dishonesty;  or, 
without  distinct  dishonesty,  to  the  pursuit  of  private  interests 
by  the  employers  of  borrowed  capital,  with  more  or  less  culpable 
indifference  to  the  interests  of  the  persons  who  own  the  capital. 
Or,  secondly,  they  may  be  due  to  mere  mismanagement  of  the 
routine  of  business — want  of  care  and  punctuality  in  meeting 
requirements,  want  of  vigilance  in  supervising  subordinates,  &c. 
These  causes,  however,  are  hardly  likely  to  affect  specially  any 
particular  branch  of  production;  and,  therefore,  most  of  the  damage 
due  to  them  will  remain  with  the  owners  or  employers  of  the 
capital  in  question.  But  a third  class  of  losses,  which  arise  from 
want  of  the  higher  kind  of  business  talent, — namely,  foresight 
as  to  important  changes  in  supply  or  demand,  and  inventiveness 
in  adapting  production  to  meet  such  changes, — being  liable  to 
affect  whole  classes  of  employers  simultaneously,  have  a much 
gi’eater  tendency  to  be  passed  on  to  the  classes  of  labourers 
employed  by  them.  It  is  hard  to  draw  a line  in  any  case  de- 
fining how  much  of  this  kind  of  loss  should  be  regarded  as  the 
normal  penalty  of  unskilfulness,  and  similarly,  how  much  of  the 
corresponding  gain  from  favourable  changes  is  the  normal  reward 
of  superior  ability;  since  it  is  difficult  to  place  definite  limits  to 
human  foresight  and  ingenuity.  But  at  any  rate  there  is  a 
good  deal  of  actual  loss  and  gain  which  we  must  place  beyond 
the  line,  and  consider — economically  speaking — as  beyond  the 
scope  of  prescience  and  provision;  and  it  would  seem  that  the 
development  of  industry  and  trade  tends  to  increase  both  the 
number  and  the  magnitude  of  such  unmerited  fluctuations  of 
income ; though  it  also  tends  to  mitigate  their  worst  effects  on 
human  life  and  happiness. 

' It  should  be  observed,  however,  that  important  changes  in  distribution 
are  mostly  accompanied  by  some  increase  or  decrease  in  the  aggregate  wealth 
of  the  community. 


364 


POLITICAL  ECONOMY 


BOOK  II 


In  examining  further  the  operation  of  such  accidents,  we 
may  not’ce  first  those  that  injure  the  community  as  a whole,  as 
well  as  p.  licular  classes.  Such  are  the  calamities  of  unusually 
bad  seasons,  plagues  of  noxious  animals,  epidemic  diseases 
among  useful  animals  and  vegetables,  extensive  damage  ft’om 
flood  or  fire,  &c.  Losses  caused  in  this  way  almost  always  fall 
with  unequal  weight  on  different  portions  of  the  community ; in 
most  cases  they  are  borne  primarily  by  employers  engaged  in 
the  branches  of  industry  affected ; a var\ung  portion  of  the  loss 
being  passed  on  to  the  consumeis  of  their  products,  the 
labourers  whom  they  employ,  the  owners  of  the  land  and 
bon’owed  capital  which  they  use,  and  the  other  producers  whose 
products  they  consume’.  The  same  may  be  said  of  the  de- 
struction of  property  caused  by  war;  though  it  is  to  be  observed 
that  so  far  as  war,  disease,  or  other  calamity  destroys  human 
life,  its  effect  on  the  amount  of  wealth  per  head  possessed  by 
the  community  is  of  a mixed  kind : since  the  survivors,  what- 
ever they  may  lose  by  such  calamities,  will  at  any  rate  gain 
relief  from  the  economic  disadvantages  of  over-crowding. 

Accidents  of  this  kind  favourable  to  production  also  occur, 
though  more  rarely;  the  most  striking  of  these  are  chance 
discoveries  of  natural  products  suitable  to  human  use,  as  in  the 
finding  of  rich  mines.  Such  discoveries,  however,  are  more 
commonly  made  by  minds  that  have  spent  time  and  energ}'  in 
searching  for  them ; in  Avhich  case  they  come  under  the  general 
head  of  Invention,  the  great  spring  of  industrial  progress. 

More  ordinarily,  important  changes  due  to  invention  consist 
in  the  discovery  not  of  new  sources  of  raw  material,  but  new 
modes  of  adapting  knoum  materials  or  forces  to  the  needs  of  in- 
dustry. Such  improvements  in  industrial  processes  of  course 
tend  to  make  the  community  ultimately  richer,  inasmuch  as  they 
increase  the  amount  of  a given  kind  of  commodity  obtainable 
by  a given  amount  of  labour.  But,  generally  speaking,  they 
tend  also  to  reduce  the  value  of  a certain  amount  of  the  capital 
already  invested  in  instruments  of  production.  Hence  their 

’ It  has  been  observed  that  the  producers  of  commodities  for  which  the 
demand  is  of  such  a kind  that — within  certain  limits — each  diminution  in 
supply  tends  to  increase  the  price  paid  for  the  total  amount  sold,  may  actuaUy 
gain  as  a class  by  any  such  disaster ; the  consumers  suffering,  through  the 
rise  in  price,  a loss  greater  than  that  which  falls  on  the  community  as  a whole. 


CHAP.  XI 


VARIATIONS  IN  DISTRIBUTION 


365 


effects  on  the  wealth  of  the  community  at  the  time  of  their 
introduction  are  necessarily  mixed ; and  may  even  be,  on  the 
whole,  temporarily  of  a negative  kind.  It  is  even  conceivable 
that  some  very  important  invention  might  reduce  the  value  of 
previously  existing  instruments  and  stocks  so  much,  that  the 
total  capital  of  the  community  would  actually  be  diminished  by 
an  amount  exceeding  the  value  of  the  new  commodities  jiroduced 
within  the  year ; so  that  the  community  would  appear  to  be 
living  on  its  capital,  in  consequence  of  what  was  really  a great 
step  in  the  advance  of  material  wellbeing.  This  paradox  is  the 
inevitable  result  (in  the  case  supposed)  of  including  in  one 
aggregate  of  wealth,  along  with  things  immediately  consumable, 
products  that  are  only  useful  and  valuable  as  a means  of  pro- 
ducing the  former : but,  since  most  of  that  part  of  real  incomes 
which  is  saved  exists  normally  in  the  form  of  such  merely 
instrumental  products,  I do  not  see  how  we  can  conveniently 
adopt  any  other  view  of  wealth,  in  discussing  Distribution.  We 
must,  therefore,  be  content  to  note  the  possibility  of  this  para- 
doxical result,  and  to  guard  ourselves  against  being  misled 

by  it. 

So  great  a destruction  of  the  existing  value  of  capital  as 
that  above  supposed  is  highly  improbable ; but  minor  effects  of 
this  kind  are,  as  I have  said,  a normal  incident  of  industrial 
progress ; and,  in  considering  the  effects  of  new  inventions  on 
distribution,  must  be  set  down  as  losses  which  may  temporarily 
more  than  counterbalance  the  economic  gain  of  such  inventions. 

This  gain  itself  will  be  distributed  in  very  various  ways 
according  to  circumstances.  Supposing  that  the  invention  can 
be  monopolised,  through  a patent  or  otherwise,  the  extra  profit 
that  its  possessor  can  secure — which  is,  of  course,  to  be  re- 
garded as  the  normal  reward  of  the  inventor’s  labour — may 
conceivably  be  equivalent  to  the  whole  of  the  economic  gain 
obtained  by  the  improvement.  But,  generally  speaking,  the 
monopolist  will  pass  on  a portion  of  this  gain  to  others,  and 
ultimately  to  the  consumers;  since,  if  (1)  the  improvement 
consists  in  cheapening  the  manufacture  of  some  old  product,  it 
will  generally  be  his  interest  to  sell  this  at  a lowered  price,  in 
order  to  secure  possession  of  the  market ; while  if  (2)  it  leads 
to  the  production  of  some  new  consumable  commodity,  it  will 
be  necessary  to  sell  this  to  the  consumers  at  such  a price  as 


366 


POLITICAL  ECONOMY 


BOOK  II 


will  give  them  a share  of  the  additional  utility  obtained  by  it, 
in  order  to  induce  them  to  alter  their  habits  of  purchase. 
Supposing,  on  the  other  hand,  that  the  invention  is  not  pro- 
tected from  imitation,  competition  will  tend  ultimately  to 
transfer  the  whole  gain  to  the  consumers ; but  generally  speak- 
ing a certain  portion  of  it  will,  during  an  interval  varying  in 
length,  be  retained  as  extra  profit  by  the  employers  who  first 
use  the  invention;  who  may  either  be  some  or  all  of  the  persons 
whose  fixed  capital  has  been  depreciated  by  the  improvement, 
or  a quite  different  set  of  persons — according  as  the  industrial 
change  in  question  is  more  or  less  sweeping  in  character. 

The  effects  of  such  a change  on  the  remuneration  of  manual 
labour  are  similarly  complex  and  various.  It  is  obvious  that 
the  value  of  what  Ave  have  before  called  the  “personal  capital” 
of  skilled  labourers — their  acquired  dexterities — is  liable  to  be 
diminished  or  annihilated  by  improvements  in  industrial  pro- 
cesses, just  as  the  value  of  material  instruments  is.  On  the 
other  hand,  the  fall  of  price  caused  by  an  improvement  fre- 
quently extends  the  consumption  of  the  products  of  the  industry 
affected  so  much,  as  to  increase  considerably  the  total  employ- 
ment offered  to  labourers  engaged  in  it,  and  to  raise  the  price 
of  the  kind  of  labour  required  to  work  the  new  process. 
Sometimes,  however,  the  extension  of  consumption  is  slight  in 
comparison  to  the  fall  in  price,  so  that  the  “ labour-saAing  ” 
improvement  diminishes  the  total  price  obtained  for  the  product 
of  the  industry  improved.  In  this  case  it  must  also  tend  to 
diminish  the  total  amount  of  labour  employed  in  the  industr}" ; 
and  since  if  the  change  takes  place  rapidly  the  labourers  thus 
turned  adrift  will  often  find  it  difficult  to  obtain  work  elseAvhere, 
it  is  not  surprising  that  improvements  in  industrial  processes 
should  have  been  thought  to  diminish  the  whole  field  of  employ- 
ment for  labour;  and  that  at  various  times  not  unenlightened 
persons  should  have  fancied  that  they  were  acting  for  the 
interest  of  the  community  in  endeavouring  to  prevent  this 
result.  But,  it  is  obvious  that,  if  of  two  processes  equally 
efficient  the  more  laborious  is  chosen,  the  utility  to  the  com- 
munity of  the  extra  labour  thus  employed  is  simply  nil ; and 
there  must  always  be  some  other  department  of  the  industrial 
system  in  which  it  could  be  applied  productively.  Indeed  it  is 
evident  that  when  the  demand  for  labour  in  one  branch  of 


CHAP.  XI 


VARIATIONS  IN  DISTRIBUTION 


367 


industry  is  diminished  by  a labour-saving  improvement  which 
cheapens  its  product,  the  purchasers  of  the  cheapened  product 
must  have  more  to  spend  on  other  articles,  so  that  there  must 
be  a correspondingly  increased  demand  for  labour  in  the 
branches  of  industry  which  supply  these  other  articles. 

What  has  been  just  said  of  the  effects  of  newly  invented 
improvements  in  the  process  of  manufacture  applies  equally 
to  the  application  of  inventions  already  published,  but  neg- 
lected for  want  of  knowledge,  enterprise,  or  capital ; except 
that  the  element  of  possible  monopoly  is  absent  in  this  case. 
Similar  effects  are  also  produced  by  improvements  in  com- 
munication and  conveyance,  and  the  opening  up  of  new  lines 
of  trade*;  but  a full  consideration  of  these  would  bring  promi- 
nently into  view  local  variations  in  industrial  incomes,  which 
I reserve  for  discussion  later  on. 

Further,  improvements  in  any  branch  of  production,  if  they 
materially  increase  or  decrease  the  value  of  its  aggregate  pro- 
ducts, tend  to  cause  secondary  changes  in  the  demand  for  the 
products  of  other  industries,  which  may  in  some  cases  be 
important ; thus  if  corn  be  materially  cheapened,  the  demand 
for  the  luxuries  of  the  poor  may  rise  to  such  an  extent  as  to 
raise  temporarily  the  profits  ai  i wages  of  the  producers  of  such 
luxuries  above  their  normal  amount.  The  new  investments  of 
capital  to  which  invention  leads  are  similarly  a source  of 
temporary  extra  gains  to  the  producers  of  certain  kinds  of 
instruments  and  materials ; thus  {e.g.)  the  introduction  of 
railways  benefited  employers  and  labourers  engaged  in  the 
production  of  iron. 

§ 4.  Other  important  changes  in  demand  continually  occur, 
with  effects  similar  to  those  just  mentioned,  independently  of 
any  amelioration  in  the  processes  of  manufacture.  To  a 
certain  extent,  indeed,  such  changes  are,  in  a larger  sense, 
to  be  regarded  as  economic  improvements;  that  is,  when  a 
general  preference  on  the  part  of  consumers  for  some  com- 
modity different  from  what  they  have  previously  been  in  the 
habit  of  purchasing  is  occasioned  by  the  fact  that  a better  or 

1 At  an  earlier  period  of  our  industrial  history  it  was  usual,  and  perhaps 
useful,  to  encourage  and  protect  by  legal  monopolies,  developments  of  trade 
no  less  than  improvements  in  manufacture.  But  in  the  present  state  of  com- 
mercial enterprise  such  artificial  encouragement  would  seem  qilite  superfluous ; 
and  is  universally  condemned  by  modern  maxims  of  economic  policy. 


368 


POLITICAL  ECONOMY 


BOOK  ir 


cheaper  means  of  satisfying  some  need  has  become  more  gene- 
rally kno^vn  or  appreciated.  But  some  alterations  in  demand, 
that  affect  production  materially,  are  due  to  the  mere  caprice  of 
fashion,  and  thus  involve  no  real  advantage  to  the  community. 
Either  kind  of  such  changes,  when  abrupt  and  extensive,  ma)' 
diminish  the  value  of  certain  portions  of  real  and  pei-sonal 
capital  in  the  way  that  we  have  seen  to  be  an  incidental 
effect  of  many  industrial  improvements;  and  may  similarly 
affect  the  relative  demands  for  certain  kinds  of  labour. 

Even  if  we  suppose  no  change  either  in  the  arts  of  industry 
or  the  habits  of  expenditure  coiresponding  to  different  gi’ades 
of  income,  many  important  changes  in  the  relative  demands  for 
the  products  of  different  industries  must  continually  result  from 
the  increase  of  w'ealth  and  population,  and  from  the  larger 
changes  in  distribution  which  these  tend  to  bring  with  them, 
through  the  operation  of  the  nonnal  conditions  already  investi- 
gated. 

As  I have  already  said,  the  highest  kind  of  business  talent 
is  shewn  in  forecasting  rightly  all  these  various  changes  and 
continually  adapting  supply  to  demand ; but  the  forecast  tends 
to  become  more  difficult  as  the  range  of  co-operation  thi’ough 
exchange  extends.  Producers  are  more  and  more  led  to  manu- 
facture for  markets  too  numerous  to  watch  carefully,  too  remote 
to  understand  adequately,  and  exposed  to  modifying  influences  of 
continually  increasing  complexity;  and  hence  fluctuations  in  the 
adaptation  of  supply  to  demand,  and  consequent  fluctuations  in 
the  incomes  of  producers,  tend  to  become  greater  and  to  contain 
a larger  element  of  mere  luck.  Manufacturei-s  and  tradem 
working  under  these  conditions  have  frequent  and  important 
occasions  of  gain  through  unexpected  developments  of  demand ; 
but  they  are  also  in  continual  danger  of  loss  through  over- 
supply of  their  commodities.  Indeed  any  considerable  gain  is 
liable  to  tend  indirectly  to  subsequent  loss,  by  the  exceptionally 
eager  competition  excited  in  the  business  that  has  suddenly 
become  profitable.  The  excess  of  production  thus  caused  some- 
times leads  to  such  a fall  in  the  price  of  the  over-abundant 
products  that  their  market-value  does  not  exceed  that  of  the 
materials  spent  in  making  them — or,  in  the  case  of  trade,  the 
value  of  imported  goods  does  not  exceed  their  value  in  the 
country  from  which  they  were  brought — thus  alloANung  no  return 


€HA1>.  XI 


VARIATIONS  IN  DISTRIBUTION 


369 


whatever  to  the  labour  and  capital  employed  in  the  production. 
Over-production  of  this  kind — even  if  it  does  not  reach  this 
degree — is  a striking  feature  of  the  modern  competitive  organ- 
isation of  industry,  extended  as  it  is  by  worldwide  trade ; and, 
owing  to  the  intimate  connexion  of  different  branches  of  produc- 
tion, fluctuations  of  this  kind  rarely  affect  one  branch  alone, 
and  frequently  occur  nearly  simultaneously  in  a considerable 
number.  This  experience  has  in  former  times  led  even  professed 
political  economists  to  the  conclusion  that  general  over-produc- 
tion is  a danger  against  which  society  has  to  guard ; that  the 
aggregate  of  labourers  co-operating  through  exchange  are  liable 
to  produce  not  only  too  much  of  a certain  kind  of  commodity, 
but  too  much  altogether.  Now  it  must  be  admitted  that  this 
result  is  a possible  one ; an  individual  may  obviously  be  led, 
from  an  over-estimate  of  the  utilities  obtainable  by  his  labour, 
to  work  harder  than  he  would  otherwise  think  it  worth  while  to 
do ; and  what  is  possible  in  the  case  of  any  one  worker  is  pos- 
sible in  the  case  of  the  aggregate  of  workers.  And  I think 
further  that  this  result. may  be  expected  to  occur,  to  a certain 
very  limited  extent,  when  any  branch  of  industry  is  abnormally 
stimulated  by  high  prices ; since  under  these  circumstances  the 
energies  of  employers  and  employed  are  often  strained  to  an 
unusual  degree,  and  a certain  margin  of  extra  labour  is  likely 
to  be  called  forth,  which  would  not  have  been  exerted  except 
for  the  high  rate  of  remuneration  which  it  is  mistakenly  sup- 
posed to  be  worth.  But  this  margin — even  supposing  it  not  to 
be  counterbalanced  by  an  equal  or  greater  reduction  of  labour 
elsewhere — will  generally  be  so  small  a part  of  the  whole  labour 
thus  employed  that  it  may  for  practical  purposes  be  neglected ; 
practically  the  over-production  of  certain  commodities  of  which 
we  have  actual  experience  may  be  regarded  as  merely  mis- 
directed production  or  temporary  disorganisation  of  production 
and  exchange.  Indeed  we  may  lay  down,  that,  owing  to  the 
defects  in  the  actual  organisation  of  industry,  which  result 
inevitably  from  the  limited  knowledge  and  imperfect  mutual 
communication  of  its  members,  society  is  always  in  a condition 
of  under-production;  i.e.,  there  is  always  a considerable  amount 
of  available  labour  unemployed,  for  which  the  actual  conditions 
of  industry  woiild,  with  better  management,  atford  remuneration 
sufflcient  to  bring  it  into  employment, 
s.  P.  E. 


24 


370 


POLITICAL  ECONOMY 


BOOK  II 


Still,  however  they  may  be  caused,  the  extensive  miscalcula- 
tions of  supply  that  produce  the  appearance  of  general  over-pro- 
duction tend  equally  to  depress  the  remunerations  of  employers 
and  employed  in  certain  branches  of  industry  below  the  normal 
rates,  and  to  depreciate  the  capital,  real  and  personal,  that  has 
been  invested  in  them.  Indeed,  when  the  miscalculation  has 
been  great,  it  may  even  annihilate  the  value  of  large  portions 
of  such  capital,  if  it  is  of  a kind  that  cannot  be  turned  to 
other  uses  without  great  loss. 

§ 5.  We  have  now  to  observe  that  such  widespread  over-jjro- 
duction  will  often  be  accompanied  by  important  fluctuations  in 
the  rate  of  interest,  and,  therefore,  will  jjroduce  effects  on  distri- 
bution beyond  the  range  of  the  special  branches  of  industry  in 
which  the  miscalculation  has  taken  place.  This  will  be  especially 
found  to  be  the  case  if  the  over-production  has  been  due  to  a 
widespread  over-estimate  of  the  profit  to  be  obtained  by  new  in- 
vestments of  capital — whether  in  the  form  of  additional  stocks 
of  consumable  goods,  destined  for  new  openings  of  trade,  or  in 
railways,  ships,  machines,  and  other  durable  instruments.  We 
have  already  noticed  that  the  demand  for  new  capital  to  be 
productively  invested  depends  at  any  particular  time  not  upon 
the  actual  productiveness  of  such  capital,  but  upon  the  general 
estimate  of  what  it  will  produce.  There  seems,  indeed,  no 
ground  for  supposing  that  this  estimate  tends,  on  the  average 
and  in  the  long  run,  to  diverge  decided!}'  fiom  the  facts  in 
either  direction.  But  experience  shews  that  the  general  view 
of  the  possibilities  of  profitable  employment  of  capital  is  liable 
to  marked  ebbs  and  flows.  Sometimes  there  is  a general  dis- 
position to  overrate  it,  “times  of  confidence,”  in  which  the 
over-production  of  which  we  have  been  speaking  takes  jilace. 
At  such  times  the  employers  who  cause  the  over-production 
avail  themselves  largely  of  the  capital  of  others ; borrowing  is 
extended,  and  an  unusual  number  of  joint-stock  companies  are 
formed ; in  consequence  of  which  the  rate  of  interest  rises  to  an 
unusual  height.  Then  when  the  miscalculation  has  become 
manifest,  numerous  bankruptcies  and  widespread  depreciation 
of  the  new  investments  occur  ; really  sound  investments  are 
affected  by  the  ruin  of  the  unsound ; the  general  confidence  is 
succeeded  by  general  distrust ; and  the  rate  of  interest  falls 
again,  not  merely  down  to,  but  below,  the  normal  rate. 


CHAP.  XI 


VARIATIONS  IN  DISTRIBUTION 


371 


In  these  fluctuations,  the  rate  of  discount  or  interest  charged 
by  bankers  for  the  use  of  the  medium  of  exchange  commonly 
fluctuates  more  than  the  rate  on  investments  generally,  as  the 
demand  for  loans  made  by  bankers  increases  more  in  proportion 
than  the  demand — made  mainly  by  joint-stock  companies — for 
the  capital  of  private  investors.  And  if  the  transition  from 
confidence  to  distrust  is  sudden  and  sharp,  it  is  liable  to  cause  a 
very  violent  fluctuation  in  the  rate  of  discount ; bankers  refuse 
to  make  loans  on  conditions  which  they  would  ordinarily  consider 
acceptable,  partly  through  fear  of  the  bankruptcy  of  the  appli- 
cants, partly  from  the  necessity  of  protecting  themselves  against 
the  consequences  of  a similar  distrust ; and  thus  the  extreme 
scarcity  of  trustworthy  medium  of  exchange  forces  up  the  price 
of  it  to  an  abnormal  height ; money  being  everywhere  wanted^ 
not  for  enlargement  of  purchases,  but  for  the  payment  of  debts 
already  incurred.  At  such  times  there  will  also  be  a rise  in  the 
rate  of  interest  on  invested  capital  generally,  not  from  an 
increase  in  the  total  amount  of  interest  received,  but  from  a 
fall  in  the  selling  value  of  securities ; which  are  extensively 
sold  owing  to  the  urgent  need  of  ready  money  and  the  high 
price  paid  for  the  use  of  it.  This  latter  change,  of  course,  does 
not  affect  the  real  income  of  persons  who  continue  to  hold  these 
securities ; but  it  involves  an  accidental  gain  to  all  who  are  at 
the  time  investing,  at  the  expense  of  those  who  find  it  needful 
to  sell  their  investments. 

Again,  other  causes  besides  miscalculation  of  prospective 
profits  on  the  part  of  employers  of  capital  may  produce  a tran- 
sient rise  in  interest.  Thus  the  commencement — or  merely  the 
fear — of  a drain  of  gold  from  banks,  for  the  payment  of  a balance 
of  debt  on  the  trade  of  the  country  or  some  other  cause,  may 
lead  bankers  to  raise  the  rate  of  interest,  in  order  to  bring  back 
the  gold  or  turn  the  balance  the  other  way.  Such  a rise  in  the 
rate  tends  to  have  the  desired  effect  in  two  ways : it  tends  to 
lower  prices, — because  it  makes  holders  of  commodities  or 
securities  prefer  selling  to  borrowing  money,  and  similarly 
diminishes  the  willingness  to  purchase, — and  thus  encourages 
exportation  and  discourages  importation ; and,  secondly,  it 
increases  the  disposition  of  foreign  creditors  to  allow  the  debts 
due  to  them  to  run  on,  in  order  to  obtain  the  higher  interest. 

This  leads  me  to  notice  another  important  class  of  variations 

24—2 


372 


POLITICAL  ECONOMY 


BOOK  ir 


in  Distribution,  that  tends  to  accompany  critical  changes  in  the 
rate  of  interest  charged  by  bankers  ; namely,  those  due  to 
variations  in  the  purchasing  power  of  money.  I have  before  ex- 
plained how  the  price  paid  for  the  use  of  money  and  its  general 
purchasing  power  tend,  to  a certain  extent,  and  under  certain 
circumstances,  to  rise  and  fall  together,  though  under  other 
conditions  they  are  more  likely  to  vary  in  opposite  directions ; 
and  I have  shewn  how  this  similarity  of  variation  is  especially 
marked  at  financial  crises.  Indeed  in  a country  where  the 
use  of  bankers’  obligations  as  a medium  of  exchange  is  general, 
and  where  the  dangerous  resource  of  inconvertible  notes  is 
eschewed,  the  most  rapid  and  impressive  variations  in  the 
purchasing  power  of  money  are  those  due  to  the  vicissitudes 
of  the  banking  system ; but  the  more  durable,  though  slower, 
variations,  caused  by  changes  in  the  relation  of  the  supply  of 
bullion'  to  the  demand  for  it,  also  produce  very  material  effects 
on  the  distribution  of  incomes.  These  effects  are  of  a somewhat 
complex  kind.  It  has  been  already  observed  that  a rise  in  the 
purchasing  power  of  money  is  advantageous  to  all  creditors, 
including  all  annuity  holders  and  all  pereons  who.se  incomes  are 
legally  fixed,  and  disadvantageous  to  all  debtors ; but  it  should 
be  noted  that  it  is  also  at  least  temporarily  advantageous  to  all 
persons  whose  rates  of  remuneration  have  a partial  stability 
through  the  mixture  of  custom^  and  informal  combination  of 
which  I have  before  spoken;  that  is,  to  large  classes  of  labourers. 
For  both  reasons,  therefore,  it  is  disadvantageous  to  employers 
of  capital,  who  are  generally  borrowers  and  at  the  same  time 
employers  of  labour ; and  by  thus  discouraging  industrial 
enterprise,  it  is  likely  to  injure  indirect!}-  some  of  the  labourers 
whom  its  primary  effect  benefits.  Similarly  a fall  in  the 
purchasing  power  of  money  causes  a sensible  diffusion  of  good 
fortune  among  employers  of  capital  and  labour ; the  benefit  of 
which  is  likely  to  be  ultimately  shared  by  the  labourei-s  whom 
they  employ,  though  immediately  these  latter  tend  to  lose 
through  the  conij^arative  immobility  of  their  money  incomes; 
while  all  who  are  legally  entitled  to  fixed  money-pa}-ments  lose, 
of  course,  without  compensation. 

1 It  should  be  remembered  that  we  are  contemplating  a society  in  which 
custom  pure  and  simple  is  supposed  not  to  interfere  materially  with  the  action 
of  competition. 


CHAP.  XI 


VARIATIONS  IN  DISTRIBUTION 


373 


§ 6.  In  considering  changes  in  the  purchasing  power  of 
money,  it  is  important  to  observe  that  such  changes  are  only 
gradually  transmitted,  and  with  unequal  rapidity,  fi-om  one  part 
of  the  country  to  another ; and  also  that  in  the  same  district 
some  industries  are  slower  in  feeling  their  effects  than  others. 
Such  inequalities  are  obviously  due  to  differences  in  the  nature 
and  extent  of  the  traffic  carried  on,  directly  or  indirectly,  between 
the  districts  in  which  money  is  produced — or  the  emporia  of 
foreign  trade  through  which  it  is  obtained  from  abroad — 
and  other  parts  of  the  country.  But  in  order  to  understand 
these  differences  thoroughly,  it  will  be  convenient  to  take  a view 
of  the  variations  that  tend  to  be  found  normally  both  in  the 
prices  of  particular  commodities,  and  in  the  general  purchasing 
power  of  money,  as  we  pass  from  district  to  district.  These  varia- 
tions are  due  primarily  to  the  localisation  of  different  branches 
of  production  (including  exchange)  in  different  places  ; which  is 
itself  traceable  to  a combination,  sometimes  rather  intricate,  of 
physical  and  historical  causes.  The  most  obvious  of  such  causes 
are  the  natural  economic  advantages  which  some  parts  of  the 
earth’s  surface  offer  for  certain  industries : thus  minerals  will 
evidently  tend  to  be  produced  where  they  are  most  abundant 
and  most  easily  extracted,  and  agricultural  products  where  soil 
and  climate  are  most  favourable : large  centres  of  trade  will  be 
formed  near  the  mouth  of  navigable  rivers,  and  manufactures 
will  flourish  where  the  raw  or  auxiliary  materials  employed  in 
them  are  easily  obtainable.  But,  in  any  explanation  of  the 
actual  distribution  of  industries  in  the  complex  group  of  com- 
munities now  more  or  less  united  by  trade  into  one  industrial 
system,  a large  place  must  be  given  to  the  influence  of  dif- 
ferences of  race,  social  condition,  and  political  circumstances 
among  the  persons  inhabiting  different  localities.  It  would 
take  us  too  far  afield  to  analyse  these  historical  conditions : 
what  we  are  rather  concerned  to  observe  is  that  when  once  an 
industry  has  been  successfully  established  in  any  place,  through 
whatever  combination  of  causes,  there  is  a certain  economic  vis 
inertiae  tending  to  maintain  it  there ; and  to  increase  it  in 
extent,  if  the  increase  of  population  and  wealth  raises  the 
demand  for  its  products  within  a given  area,  or  if  improvements 
in  communication  enlarge  the  area  which  can  be  profitably 
supplied  from  one  centre.  This  vis  inertiae  may  be  analysed 


374 


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into  several  elements,  variously  combined  in  different  cases. 
Partly,  a manufacturer  who  started  elsewhere  would  have  more 
difficulty  in  obtaining  a market  for  his  commodities,  from  the 
established  reputation  attaching  to  the  locality  in  question: 
{e.g.)  equally  good  hardware  made  at  Halifax  would  not  com- 
mand the  price  of  Sheffield  hardware.  Partly,  again,  he  would 
have  more  difficulty  in  obtaining  the  requisite  skilled  labour: 
while  further,  especially  in  departments  of  industry'  in  which 
the  subdivision  of  employments  has  been  carried  to  great  lengths, 
any  one  branch  of  production  tends  gradually  to  have  collected 
in  its  neighbourhood  auxiliary  and  connected,  but  separately 
organised,  industries ; so  that  a producer  by  settling  in  this 
neighbourhood  has  superior  facilities  for  obtaining  the  materials 
or  instruments  he  requires. 

Through  this  combination,  then,  of  physical  and  historical 
conditions  it  comes  to  pass  that  the  main  part  of  the  demand  of 
a region  often  very  large,  for  commodities  of  a certain  quality, 
tends  to  be  supplied  from  a district  or  districts,  the  extent  of 
which  is  but  small — sometimes  insignificant— in  comparison 
with  the  whole  area*.  And,  to  meet  the  expense  of  carriage, 
the  money-price  paid  by  consumers  for  such  commodities  tends 
to  increase,  roughly  speaking^,  in  proportion  to  the  distance 
that  separates  the  consumer  from  the  centre  of  diffusion.  But 
it  is  to  be  observed  that  the  real  exchange-value  of  the  com- 
modities may  vary  somewhat  differently  from  the  money-price ; 
since  money  itself  tends  to  have  somewhat  different  values  in 
different  districts.  For  instance,  in  a country  which  obtains  its 
coin  and  bullion  from  abroad,  the  purchasing  power  of  mone}' 
will  tend  to  be  appreciably  higher  in  districts  unfavourably 
situated  for  exchanging  commodities,  directly  or  indirectly,  with 
the  emporia  of  foreign  trade;  that  is,  districts  between  which 
and  the  places  with  which  they  trade  the  cost  of  carriage  is 
high,  while  there  is  no  such  keen  demand  for  their  products 

1 Where — as  is  mostly  the  case  in  industries  other  than  agriculture — this 
development  of  trade  leads  to  the  close  aggregation  of  a large  number  of 
labourers,  the  resulting  inequality  in  the  distribution  of  population  is  increased 
by  the  further  aggregation  of  retail  traders  and  artisans  to  supply  consumable 
commodities  to  the  other  aggregate. 

^ The  interest  that  manufacturers  and  traders  generally  have  in  extending 
their  business  induces  them  sometimes  to  take  a part — or  even  the  whole — of 
this  cost  on  themselves,  in  transmitting  their  .products  to  distant  consumers. 


CHAP.  XI 


VARIATIONS  IN  DISTRIBUTION 


375 


outside  as  would  enable  them  to  throw  the  greater  part  of  this 
cost  on  their  customers.  The  theoretical  maximum  of  possible 
difference  between  the  exchange  values  of  money  in  any  two 
districts  compared  is  constituted,  as  we  have  seen,  by  the  cost 
of  carrying  money  one  way  and  some  kind  of  goods  the  other 
way;  but  in  an  advanced  industrial  community  with  a. (fully 
developed  banking  system,  the  cost  of  carrying  money  itself  is 
comparatively  insignificant,  at  least  in  comparing  districts  not 
very  remote,  and  we  have  mainly  to  consider  the  cost  of  carrying 
goods.  This  cost  and  the  resultant  differences  will  of  course 
vary  with  the  facilities,  natural  and  artificial,  for  transport; 
hence  prices  may  be  more  nearly  equalised  at  comparatively 
remote  places  in  the  neighbourhood  of  a coast  or  a railway, 
than  at  places  comparatively  near  each  other,  but  connected 
only  by  indifferent  roads. 

Further,  it  is  to  be  observed  that  local  variations  of  prices 
will  be  more  marked  in  the  case  of  commodities  that  are  either 
heavy  ip  proportion  to  their  value,  or  liable  to  injury  during 
transport,  than  in  the  case  of  lighter  and  more  durable  or  more 
safely  portable  articles.  And  since  in  these  various  ways  the 
differences  in  the  exchange  value  of  money,  as  between  any  two 
districts  compared,  will  tend  to  be  different  in  relation  to  differ- 
ent commodities ; it  may  easily  happen  that  the  practical 
purchasing  power  of  money  w'ill  have  different  local  variations 
for  different  classes  of  incomes.  Thus  an  unskilled  labourer’s 
money  wages  may  go  further  in  a remote  rural  district,  owing 
to  the  cheapness  of  the  food,  fuel,  and  house-room  which  they 
are  chiefly  spent  in  providing ; while  to  a professional  man  living 
in  the  same  place  the  gain  in  this  way  may  be  more  than  out- 
weighed by  the  increased  cost  of  certain  luxuries. 

All  these  differences  have  to  be  taken  into  account  in  con- 
sidering the  normal  effects  of  industrial  competition ; since;  as 
we  have  seen, — quite  apart  from  any  obstacles  to  the  mobility 
of  labour, — this  does  not  necessarily  tend  to  equalise  money- 
wages,  but  only  to  get  rid  of  any  considerable  and  generally 
recognised  differences  in  the  net  advantages  obtainable,  on  the 
average,  by  equally  efficient  and  industrious  labourers  in  the 
same  industrial  grade. 

I 7.  The  tendency  to  such  equalisation,  however,  is — as  we 
have  already  noticed — still  further  limited  by  the  existence  of 


376 


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obstacles  that  impede  the  migration  of  labourers.  These  ob- 
stacles would  still  exist  to  a certain  extent,  even  if  the 
influence  of  mere  inertia  and  easily  removable  ignorance,  as 
well  as  the  more  definite  hindrances  to  migration  that  have 
sometimes  been  interposed  by  law,  and  the  barriers  against  intm- 
sion  sometimes  raised  by  combinations  of  labourers  S were  alto- 
gether eliminated.  There  would  always  be  a certain  expense, 
trouble,  and  loss  of  time  involved  in  transporting  an  individual — 
and  still  more  a family — to  a distant  place;  there  would  generally 
be  a loss  of  indefinite  advantages  derivable  from  the  kindly 
regard  of  neighbours,  and  a loss  of  useful  knowledge  of  the 
special  conditions  of  industrial  and  social  life  in  a given  localitv 
— which  would  be  greater  if  the  change  involved  the  learning  of 
new  modes  of  work;  and  there  might  still  be  a general  aversion 
to  leaving  familiar  scenes  and  breaking  social  relations.  If, 
however,  we  suppose  the  distribution  of  industries  and  industrial 
population  to  remain  without  material  change  for  a considerable 
time,  these  obstacles  alone  could  hardly  hold  pennanentlv  in 
check  the  forces  tending  to  equalisation,  at  least  Avithin  a 
modem  country ; since  the  influences  above-mentioned  would 
not  commonly  affect  strongly  more  than  a part  of  the  popula- 
tion of  any  district;  and  the  prospect  of  higher  wages  elsewhere 
would  continually  attract  the  more  migratory  element — e.g., 
young  unmarried  or  newly  married  persons  of  an  enterjirising 
turn  of  mind’'.  Even  if  the  change  involved  expatriation  and 
the  learning  of  a new  language,  I do  not  think  the  obstacles — 
apart  from  inertia  and  ignorance — would  be  sufficient  to  main- 
tain a recognised  difference  of  wages  for  similar  labour,  between 
any  two  countries  sharing  the  civilisation  of  modem  Europe. 

Such  obstacles  to  migration  affect  the  more  highly-paid 
labourers,  including  the  employers  of  labour  and  cajjital,  in  a 

* It  should  be  observed  that  in  other  ways  Trades-Unions  tend  to  aid  the 
mobility  of  labour  from  place  to  place;  by  developing  habits  of  concerted  action 
among  labourers,  elevating  the  average  level  of  their  intelligence,  collecting  and 
diffusing  information  as  to  rates  of  wages  in  different  locahties,  <tc. 

- It  is  assumed  in  this  argument  that  the  average  personal  efficiency  of 
labourers  in  the  same  industry  is  the  same  iu  different  localities.  The  tendency 
to  equalisation  is  impeded,  so  far  as  the  average  efficiency  in  different  places  is 
different,  even  if  the  difference  be  such  as  is  likely  to  be  gradually  removed  by 
migration.  An  important  case  of  this  kind  is  the  low  average  efficiency  of 
labour  in  certain  places  which  results  from  the  very  lowness  of  its  remuneration 
causing  an  inadequate  supply  of  the  necessaries  of  healthy  life. 


CHAP.  .XI 


VARIATIONS  IN  DISTRIBUTION 


377 


less  degree  than  others ; and,  though  the  greater  part  of  capital 
already  invested  is,  at  best,  far  less  mobile  than  labour,  still, 
in  an  industrially  advanced  country,  where  wealth  grows 
rapidly,  floating  capital  tends  to  flow  rapidly  and  in  large 
volume  into  localities  specially  favourable  for  production. 
Hence,  supposing  no  material  change  to  take  place  in  the  local 
distribution  of  industries,  the  net  advantages  generally  believed 
to  be  obtainable  by  the  employment  of  equal  amounts  of  new 
capital  in  different  localities  would  before  long  be  roughly 
equalised.  This  equalisation  would  not,  of  course,  extend  to 
rent,  or  to  any  extra  profit  analogous  to  rent  accruing  on  capital 
partially  exempted  by  circumstances  from  competition.  Such 
extra  yields  tend  rather  to  become  more  unequal,  as  the  concen- 
tration of  labour  and  capital  in  certain  places  becomes  more 
intense  through  the  growth  of  population  and  the  specialisation 
of  industries. 

We  may  conclude,  in  short,  that,  under  the  influence  of  in- 
dustrial competition,  the  special  economic  advantages  attached 
to  different  localities,  supposing  them  to  remain  substantially 
unaltered,  would  ultimately  express  themselves  in  the  distribu- 
tion of  industrial  incomes  mainly  in  the  form  of  rent  or  some 
extra  yield  similar  to  rent.  But  in  fact  such  local  advantages 
are  continually  undergoing  changes  so  rapid  and  extensive,  as  to 
balance — or  more  than  balance — during  a considerable  period 
the  equalising  forces  of  industrial  competition.  Sometimes 
the  extension  of  an  industry  already  established  in  a certain 
district  is  so  rapid,  owing  to  the  extension  of  the  demand 
through  improvements  either  in  processes  of  manufacture  or 
means  of  communication  with  other  districts,  or  perhaps  to  a 
rise  in  demand  in  consequence  of  a change  of  social  habits  or 
industrial  needs,  that,  in  spite  of  the  continual  increase  in 
the  supply  of  labour  and  capital  employed  in  the  industry, 
the  remuneration  of  both  labourers  and  employers  continues 
for  many  years  to  remain  at  a scarcity  height.  Sometimes, 
again,  the  extension  of  our  knowledge  of  localised  natural  re- 
sources, or  the  discovery  of  new  means  of  obtaining  or  using 
materials  already  known,  may  alter  importantly  the  relative 
advantages  of  different  districts  for  a certain  kind  of  production, 
so  that  large  new  centres  of  industry  may  be  rapidly  formed  in 
new  districts,  and  old  ones  deserted.  The  development  of  the 


378 


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cotton  manufacture  in  Lancashire  after  the  inventions  of  Ark- 
wright and  Watt  is  an  instance  of  the  former  kind  of  change ; 
the  discoveries  of  new  valuable  mines  most  strikingly  illustrate 
the  latter. 

The  effects  of  such  changes  on  other  inhabitants  of  the  dis- 
tricts in  which  they  occur  are  complex,  and  vary  somewhat 
according  to  the  precise  nature  of  the  change  and  the  conditions 
of  the  industry  primarily  affected.  If  these  latter  are  such  that 
an  additional  amount  of  produce  cannot  be  obtained  except  at  a 
higher  cost,  a rise  in  demand  or  improvement  in  communication 
that  leads  to  a larger  sale  of  the  produce  in  question  outside  the 
district  must  ceteris  'paribus,  thx’ough  the  consequent  rise  in  price, 
inflict  loss  on  all  consumers — -as  such — within  the  district.  In 
the  case  of  the  products  of  manufactures — as  distinct  from  those 
of  agriculture  and  mining — this  result  is  not  likely  to  occur, 
except  very  transiently ; here,  as  we  have  before  seen,  increased 
production  generally  leads  to  greater  cheapness.  And  in  all 
cases,  the  flow  of  labour  and  capital  to  a district  where  a manu- 
facturing or  mining  industry  is  growing  tends  to  bring  gain  to 
other  industries  of  the  same  district  b}'  increasing  the  local 
market  for  their  products : in  particular,  the  development  of  a 
manufacture  in  a town,  increasing  its  population  and  demand 
for  food,  tends  to  benefit  the  agricultural  producei-s  in  the  sur- 
rounding country.  The  same  process  of  development,  however, 
is  likely  to  be  accompanied  by  a general  I'ise  in  the  remunera- 
tion of  labour  throughout  the  district : hence  so  far  ;is  the 
products  thus  locally  raised  in  demand  are  eirsily  transportable, 
the  producers  in  the  district  are  likely  to  be  closely  pressed  by 
the  competition  of  similar  producei's  outside,  and  consequently 
to  withdraw  their  capital  to  other  departments  of  production 
in  which  their  local  advantages  are  less  easy  to  dispute.  In  this 
way  the  successful  establishment  of  any  one  great  centre  of 
industry  in  any  district  has  a tendency  to  promote  indirectly 
the  concentration  of  other  industries  in  other  localities. 

On  the  other  hand,  when  one  kind  of  production — say  the 
production  of  hardware — develops  in  one  district  (A)  through  an 
increased  sale  of  its  products  in  another  district  (B),  this  develop- 
ment is  likely  to  be  accompanied  by  a decline  in  the  production 
of  hardwaie  or  some  similar  product  in  B or  elsewhere.  Such 
a change  will,  in  all  ordinary  cases,  be  ultimately  a gain  on  the 


CHAP.  XI 


VARIATIONS  IN  DISTRIBUTION 


379 


whole  to  the  larger  region  including  the  two  districts ; since  the 
labour  that  would  otherwise  have  produced  hardware  may  be 
employed  more  advantageously  in  some  other  way.  But  it 
should  be  observed  that  there  is  no  general  reason  for  assuming 
that  this  new  remunerative  employment  will  be  found  within 
the  limits  of  the  district — say  B — in  which  the  production  of 
hardware  has  been  superseded : especially  if  the  labour  thus 
dispensed  with  is  a considerable  part  of  the  whole  labour  of  B. 
This  point  is  not  of  great  importance  so  long  as  A and  B are 
within  the  same  country;  but  when,  in  the  next  Book,  we  come 
to  consider  the  arguments  for  perfect  freedom  of  trade  between 
different  countries,  we  shall  have  to  take  note  of  the  displace- 
ments of  labour  that,  in  certain  circumstances,  tend  to  ac- 
company the  development  of  such  trade. 

§ 8.  The  consideration  of  the  local  and  transient  variations, 
with  which  this  chapter  is  primarily  concerned,  naturally  leads 
us  on  to  inquire  how  far  tendencies  of  change  operating 
uniformly  or  mainly  in  one  direction,  and  therefore  more  perma- 
nent in  their  effects,  are  discernible  in  the  past  history  and 
present  condition  of  industry;  how  far,  in  short,  the  future 
economic  history  of  our  existing  societies  can  be  inferred  from 
the  experience  already  gained  of  their  laws  of  development. 
This  inquiry  is  a most  fascinating  one;  but  it  does  not  seem  to 
me  capable  of  being  instructively  treated  in  any  detail,  accord- 
ing to  the  method  adopted  in  the  present  Book ; i.e.,  as  a 
problem  of  economic  science  as  distinguished  from  general 
sociology.  And  indeed  any  general  forecast  of  future  economic 
changes,  attained  by  any  method  claiming  to  be  scientific, 
must,  I conceive,  be  vague  and  conjectural,  except  so  far  as  it 
is  avowedly  hypothetical.  Hypothetical  changes  in  production 
and  distribution — the  hypothesis  being  that  some  one  of  the 
important  factors  in  causing  the  present  state  of  things  under- 
goes a change  while  the  others  remain  stationary — are  not 
difficult  to  work  out:  indeed  I have  already  found  it  convenient 
to  indicate  such  hypothetical  results  to  some  extent  in  previous 
chapters,  in  order  to  make  clear  my  view  of  the  economic  forces 
whose  combined  operation  maintains  the  actual  distribution 
of  produce.  But  any  positive  prophecy  of  the  industrial 
future  of  civilised  society — involving,  as  it  must,  a forecast 
of  the  probable  changes,  in  kind  or  amount,  of  all  the  important 


380 


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lactors — is  indefinitely  more  difficult.  Any  such  prophecy 
must  either  be  in  a naiTOAV  sense  empirical,  and  therefore  only 
useful  in  relation  to  a very  limited  period  of  the  proximate 
future,  or  else,  if  it  ventures  to  look  further  ahead,  it  must 
content  itself  with  giving  very  vague  and  dubious  answers  to 
the  questions  of  most  interest.  Still  it  seems  desirable  to 
attempt  briefly  such  a vague  and  general  forecast  of  economic 
changes  as  seems  to  me  possible,  wfithout  going  beyond  the 
limits  that  I have  marked  out  for  myself  in  the  present 
treatise'. 

But  in  order  to  attain  even  such  guarded  conclusions,  we 
must  begin  by  making  certain  assumptions.  We  must  assume 
that  the  present  individualistic  order  of  society — the  regime  of 
private  property  and  free  contract — is  to  be  maintained  without 
any  fundamental  change : and  we  must  also  assume  the  con- 
tinuance and  increasing  diffusion  of  the  progressive  cirilisation 
which  now  unites  into  one  organic  whole  the  inhabitants  of 
Europe  and  of  the  countries  colonised  therefrom.  On  the  basis 
of  this  latter  assumption  we  may  lay  down  generally  that 
population  will  increase  in  the  aggregate  of  countries  that  will 
share  this  civilisation,  and  with  it  accumulated  wealth,  and 
that  the  arts  of  industry  will  improve:  though  we  cannot  say 
what  will  be  the  relative  proportion  of  these  different  kinds  of 
growth — nor  can  we,  of  course,  affinn  that  population  and 
wealth  will  increase  in  every  part  of  the  cirilised  world. 
Assuming  improvement  in  the  arts  of  industry,  we  may  state  it 
as  probable  that  any  given  utility  will  be  attained  hereafter  by 
a diminished  expenditure  of  “ labour  and  capital,”  that  is, 
labour,  and  delay  interposed  between  the  application  of  the 
labour  and  the  enjojunent  of  the  utility  at  which  it  aims ; 
except  so  far  as  (1)  the  consumption  'without  replacement 
of  the  “ unearned  ” gifts  of  nature,  or  (2)  the  diminished  ratio 
borne  by  these  natural  bounties  to  the  needs  of  the  increasing 
population,  renders  it  needful  to  use  more  labour  and  capital  to 
obtain  an  equal  quantum  of  utility\  We  may  expect,  therefore, 
that,  generally  speaking,  commodities  that  are  now  made  by- 
complicated  processes  of  manufacture  ■vrill  fall  in  value  relatively’’ 
to  most  products  of  mining  and  agriculture : but  whether  any’ 

' Especially  since  Mill  has  treated  this  part  of  the  subject  at  some  length  in 
his  IVth  book  in  a confidently  dogmatic  manner  which  I am  unable  to  imitate. 


CHAl’.  XI 


VARIATIONS  IN  DISTRIBUTION 


381 


particular  class  of  human  needs  or  desires  is  likely  to  be  satisfied 
hereafter  with  more  or  less  outlay  of  labour  and  capital  than  it  is 
at  present,  cannot,  I think,  be  clearly  foreseen.  Primd  facie  the 
operation  of  the  causes  that  tend  to  increase  cost  would  seem 
to  be  most  marked  in  the  case  of  the  jjroducts  of  extractive 
industry ; since  the  supply  of  any  paiticular  metal,  from  an}' 
given  district  where  mining  fiourishes,  is  continually  being  con- 
sumed without  replacement ; and  after  a certain  amount  ha,s 
been  extracted,  any  further  supply  from  the  same  district  tends 
to  be  obtained  at  a continually  increasing  cost.  On  the  other 
hand,  this  tendency  is  counteracted  by  the  discovery  of  new 
sources  of  supply  and  new  developments  of  the  arts  of  mining : 
and  I do  not  think  that  we  have  any  means  of  deciding  which 
of  these  conflicting  forces  is  likely  to  be  strongest — so  far  as  the 
general  effect  on  the  civilised  world  is  concerned' — within  any 
period  which  it  is  worth  while  to  consider. 

An  exception  must  perhaps  be  admitted  in  the  case  of  gold: 
since,  owing  to  the  eagerness  with  which  gold  has  been  sought, 
and  the  comparative  ease  with  which  it  has  been  extracted  from 
the  alluvial  deposits  that  have  furnished  so  large  a part  of 
the  supply  hitherto  obtained,  it  is  reasonable  to  suppose  that 
this  source  of  supply  is  by  this  time  to  a great  extent  exhausted 
over  a great  part  of  the  civilised  world.  It  seems,  therefore, 
probable  that  before  very  long  our  supplies  of  gold  will  be 
chiefly  obtained  by  the  hitherto  more  costly  and  difficult 
process  of  vein-mining:  and  that  in  consequence  the  value 
of  gold  will  rise  very  materially  unless  some  great  change,  such 
as  we  have  at  present  no  ground  for  anticipating,  should  take 
place  in  the  demand  for  the  metal.  But  even  this  probability 
is,  I conceive,  at  present  too  remote  and  uncertain  to  have 
strong  claims  on  the  attention  of  practical  men. 

1 Somewhat  more  definite  probabilities  are  doubtless  obtainable  as  regards 
the  prospects  of  mining  in  any  particular  country  in  which  mines  have  long  been 
worked:  but  even  these  must  involve  a large  element  of  uncertainty.  In  the 
case  of  England  special  attention  has  been  given  to  the  prospects  of  coal  mining 
with  which  the  future  of  the  great  iron  industries  of  the  country  at  present 
seems  to  be  bound  up.  The  question  was  examined  by  a Royal  Commission 
who  arrived  at  the  conclusion  that  the  available  coal  in  England  may  be  expected 
to  be  exhausted  in  three  or  four  hundred  years,  supposing  the  consumption  of 
coal  to  increase  in  the  future  at  a rate  simply  inferred  from  its  past  increase. 
But  this  supposition  requires  us  to  assume  an  increase  of  population  which  must 
be  regarded  as  highly  problematical. 


382 


POLITICAL  ECONOMY 


BOOK  II 


The  condition  of  agriculture  in  a new  country  is  often  to 
some  extent  similar  to  that  of  mining : so  far  as  tillage  is 
applied  to  naturally  fertile  lands  whose  fertility  is  gradually 
exhausted  by  the  comparatively  unlaborious  methods  of  culti- 
vation, which  are  also  the  most  economical  methods  so  long 
as  land  is  plentiful  and  cheap.  But  this  state  of  things  passes 
away  as  the  country  gets  filled  : and  at  any  rate  after  a certain 
density  of  population  has  been  reached,  the  agricultural  pro- 
cesses that  are  on  the  whole  most  economical  are  such  as 
continually  maintain  the  productiveness  of  the  land  cultivated : 
so  that  henceforth,  apart  from  growth  of  population,  there 
would  be  no  important*  reason  for  anticipating  a future  increase 
in  the  cost  of  obtaining  agricultural  produce.  Supposing,  how- 
ever, that  there  is  to  be  a growth  of  population  in  the  world  at 
large  similar  to  that  which  has  already  taken  place  in  the 
countries  most  industrially  advanced,  what  I have  called  the 
“ final  ” cost  of  obtaining  the  agricultural  produce  required  for 
this  population — i.e.,  the  cost  of  the  costliest  portion  needed  to 
meet  the  demand — must  some  time  or  other  be  materially 
increased,  unless  an  entirely  novel  development  should  take 
place  in  the  art  of  agriculture.  We  may  infer  this  by  con- 
sidering what  would  take  place  if  England  and  the  most  ad- 
vanced parts  of  Western  Europe  were  now  cut  off  from  trade  %vith 
the  rest  of  the  world : there  can  be  no  doubt  that  the  price  of 
agricultural  produce  would  be  materially  raised  in  consequence 
of  the  more  than  proportional  outlay  of  labour  and  capital 
which  would  be  required  to  produce  the  additional  amount 
of  such  produce  that  even  the  existing  population  Avould  need. 
More  land  would  be  wanted  and  more  expensive  processes  would 
be  applied  to  the  land  now  under  cultivation : the  price  and 
rent  of  land  would  rise  in  consequence,  and  all  members  of  the 
community  except  landowuiers  Avould  suffer  proportionally  as 
consumers.  And  a result  similar  to  this  must  be  anticipated 
hereafter  for  the  civilised  world,  unless  population  is  checked — 
or  the  arts  of  agriculture  improved — in  a manner  which  the 
experience  of  modern  civilisation  gives  us  no  positive  reason  to 
anticipate. 

1 We  should  have,  no  doubt,  to  look  forward  to  the  exhaustion  of  certain 
supplies  of  manure — such  as  guano — but  this  is  a kind  of  loss  which  we  may 
fairly  hope  to  see  reduced  to  insignificance  by  improvement  in  the  arts. 


CHAP.  XI 


VARIATIONS  IN  DISTRIBUTION 


383 


So  far,  I think,  the  Ricardian  doctrine  as  to  the  tendency  of 
agricultural  rent  to  increase  as  society  progresses  must  be 
admitted  to  be  true.  But  this  ultimate  result  is  as  yet  very 
distant — far  beyond  the  limits  of  any  practical  forecast.  And 
we  have  no  reason  to  expect  that  there  will  be  anything  like  a 
steady  rise  in  the  price  of  agricultural  produce,  or  in  the  price 
and  rent  of  agricultural  land  throughout  the  civilised  world, 
during  the  interval  of  time  that  we  have  to  pass  through  before 
we  reach  this  ultimate  result.  For  a long  time  to  come  the 
pressure  of  increasing  population  may  easily  be  more  than 
counterbalanced  by  improvements  in  agriculture  and  trade. 
And,  as  regards  increase  of  rent  in  particular,  it  is  not  impro- 
bable that  agricultural  improvement  in  the  future  may  partly 
take  the  direction  either  of  diminishing  the  natural  differences 
in  the  productiveness  of  different  kinds  of  land  similarly  culti- 
vated, or  of  diminishing  the  differences  in  their  economical 
value  by  a more  careful  utilisation  of  their  special  adaptation  to 
different  kinds  of  cultivation’.  If  this  should  take  place  to  any 
great  extent,  then,  until  all  the  land  susceptible  of  this  equa- 
lising process  has  been  brought  under  its  influence,  the  progress 
of  population,  trade,  and  agriculture  combined  is  likely  to 
cause  fluctuations  incapable  of  being  now  foreseen  in  the  rent 
of  agricultural  land ; rather  than  the  steady  increase  which 
Ricardo  regards  as  inevitable,  in  the  price  paid  “ for  the  use 
“ of  its  original  and  indestructible  powers.” 

I do  not,  however,  think  that  there  are  any  corresponding 
reasons  for  doubting  that  the  differential  value  of  building  land 
in  towns  will  continue  to  increase  steadily  as  civilisation  pro- 
gresses. It  is  indeed  possible  that  the  growth  of  towns  may  be 
a less  prominent  feature  of  the  development  of  civilisation  in 
the  future  than  it  has  been  in  the  past : but  I know  no  positive 
grounds  for  anticipating  this.  And  if  the  proportion  of  urban 
to  rural  population  increases  steadily,  as  a country  becomes 

’ Mr  Simon  W.  Patten  (Premisses  of  Political  Economy,  e.  vi.  p.  173)  argues 
that  this  is  even  now,  to  an  important  extent,  the  tendency  of  agricultural 
improvement.  “The  progress  of  civilisation  causes  much  of  the  poor  land 
“ to  become  good,  not  only  through  the  increased  use  of  capital  and  skill,  but 
“ also  through  the  gradual  change  in  the  demand  for  food,  allowing  those  crops 
“ to  be  raised  for  which  the  land  is  best  fitted.  There  are  two  opposing  tenden- 
“ cies,  the  one  causing  inferior  land  to  be  cultivated,  the  other  changing  the 
“ inferior  lands  into  good  lands.” 


384 


POLITICAL  ECONOMY 


BOOK  II 


mure  thickly  inhabited  by  a civilised  population,  it  is  scarcely  con- 
ceivable that  the  proportion  of  the  whole  produce,  obtained  by  the 
owners  of  land  in  or  near  towns,  should  not  increase  pari  passu. 

Turning  from  rent  to  interest,  we  again  find  hj-pothetical 
prediction  easy,  but  positive  forecast  difficult.  It  is  obvious, 
in  the  first  place,  that  a rise  in  rent  due  to  the  cause  just  dis- 
cussed— if  not  compensated  by  improvements  in  other  depart- 
ments of  industry,  rendering  labour  and  capital  on  the  whole  not 
less  productive  than  before — must  tend  to  be  accompanied  by  a 
fall  in  the  real  returns  to  capital,  as  well  as  in  the  real  remune- 
ration of  labour.  Putting  this  consideration  on  one  side — i.e., 
assuming  for  simplicity  that  industrial  improvement  just 
balances  the  tendency  of  increased  population  to  increase  the 
“ final  ” cost  of  agricultural  produce — the  prospect  of  a rise  or 
fall  in  interest  depends  on  the  probable  future  proportion 
between  (1)  the  increase  of  saving  and  (2)  the  increase  in 
the  industiial  and  other  demands  for  capital.  Neither  (1)  nor 
(2)  can  be  predicted  with  any  confidence ; but  I should  conjec- 
ture that  the  impulses  that  prompt  to  accumulation  are,  on  the 
whole,  likely  to  grow  stronger  in  average  men,  as  civilisation 
progresses ; for  though  the  development  of  culture  may  make 
some  persons  spend  their  time  in  artistic  or  scientific  pursuits 
who  would  otherwise  have  been  absorbed  in  money-making, 
I think  that  the  diminution  in  accumulation  due  to  this  cause 
is  likely  to  be  more  than  compensated  by  the  general  increase 
in  men’s  concern  for  the  future.  I think,  therefore,  that — if  the 
individualistic  organisation  of  society  remains  substantially 
unaltered — the  proportion  of  capital  to  population  is  ceteris 
paribus  likely  to  increase.  Is  then  the  increase  in  the  demand 
for  capital  likely  to  balance  this  increase  in  supply  ? On  the 
whole,  it  seems  to  me  most  probable  that  this  will  not  be  the 
case ; for  the  non -industrial  demand  for  the  savings  of  indivi- 
duals, chiefly  for  warlike  purposes,  which  so  markedly  chai-ac- 
terises  the  century  that  has  just  elapsed,  can  hardly  be  regaixied 
as  likely  to  be  a normal  incident  of  the  preponderantly  indus- 
trial period  of  ci\'ilised  history  which  seems  to  lie  before  us : 
and  though  hitherto,  no  doubt,  industrial  improvement  has  been 
accompanied  by  an  increase  on  the  whole  in  the  industrial 
demand  for  capital,  I do  not  see — as  I have  before  said* — why 

* See  page  160. 


CHAP.  XI 


VARIATIONS  IN  DISTRIBUTION 


385 


this  should  always  be  the  case.  Some  recent  inventions  have 
tended  importantly  to  diminish  the  demand  for  capital, — e.g., 
the  use  of  the  telegraph  by  traders  has  tended  to  reduce  the 
amount  of  goods  that  it  is  necessary  to  keep  in  stock,  for  the 
most  economical  performance  of  the  functions  of  trade ; and  it 
seems  quite  within  the  limits  of  probability  that  the  inventions 
of  the  future  may  have  this  effect  to  a greater  extent.  On  the 
whole,  therefore,  I should  be  disposed  to  conjecture  that  the 
demand  for  capital  will  not  increase  so  as  to  balance  the  increase 
in  supply,  and  that,  therefore,  the  rate  of  interest  will  slowly 
decline.  I should  expect  the  decline  to  be  slow,  owing  to  the 
check  that  the  fall  will  give  to  accumulation : but  I see  no 
reason  for  placing  a definite  limit  to  it : I do  not  see  why  it 
should  not  go  on  till  the  interest  on  capital  not  employed  by  its 
owner  does  not  amount  to  more  than  a fair  insurance  against 
risk,  so  that  the  desire  of  obtaining  interest  ceases  to  be  an 
important  motive  for  accumulation ; though  there  is  no  reason 
to  think  that  this  limit  will  be  reached  until  after  a very  long 
interval. 

In  speaking  of  rent  and  interest  I have  by  implication  said 
all  that  seems  to  be  necessary  on  the  prospects  of  increase  or 
decrease  in  the  average  remuneration  of  labourers  taken  in  the 
aggregate.  Nor  is  there  much  that  could  profitably  be  said — 
even  in  the  most  conjectural  way — as  to  the  probable  distribu- 
tion of  the  aggregate  remuneration  of  labour  among  different 
classes  of  labourers  in  the  industrial  community  of  the  future, 
without  going  clearly  beyond  the  limits  of  the  method  adopted 
in  the  present  Book.  For  I conjecture  that  a very  important 
factor  in  the  distribution  of  the  future  will  be  Monopoly  formed 
by  Combination,  of  varying  degrees  of  completeness;  and  that 
accordingly  the  case  noticed  at  the  close  of  the  last  chapter — 
in  which  Combination  meets  Combination  and  determines  the 
division  of  gain  and  loss  otherwise  than  competitively — is  likely 
to  be  a common  case.  Who  precisely  will  combine  with  whom, 
or  against  whom,  it  would  be  rash  to  predict : nor  (as  we  have 
seen)  does  economic  science  enable  us  to  determine  the 
principles  on  which  the  opposing  combinations  will  settle  their 
disputes ; though  it  may  give  some  instruction  as  to  the  appli- 
cation of  any  principle  that  may  be  accepted  for  this  purpose  b 
1 See  c.  vii.  § 7 of  the  next  Book. 


S.  P.  E. 


25 


CHAPTER  XII. 


Custom. 


§ 1.  In  the  preceding  chapters  we  have  been  chiefly  en- 
deavouring to  ascertain  the  general  way  in  which  the  exchange 
values  of  material  products  and  the  remuneration  of  different 
classes  concerned  in  industry  would  be  determined  in  a society, 
Avhose  members  enjoy  perfect  freedom  of  contract  and  freedom  in 
the  choice  of  domicile  and  calling,  and  further  possess  the  charac- 
teristic of  always  seeking  to  obtain  for  the  commodity  that  they 
exchange  the  largest  real  return  that  they  know  to  be  obtain- 
able— taking  all  kinds  of  gain  and  loss  into  account.  It  is 
only  in  respect  of  the  assumed  universal  presence  of  this  charac- 
teristic, not  in  the  absence  of  any  ordinary  human  impulses 
compatible  with  this,  that  the  ideal  indi\ddual  to  Avhom  our 
economic  deductions  directly  relate — the  “ economic  man  ” as 
he  has  been  called — should  be  conceived  to  differ  from  an 
ordinary  member  of  a modem  civilised  community.  That  such 
a difference  exists,  to  a not  unimportant  extent,  has  been  in- 
cidentally noticed  several  times  in  the  preceding  chapters ; but 
it  seems  desirable,  before  concluding  this  part  of  the  treatise,  to 
analyse  its  causes  rather  more  fully  than  has  yet  been  done. 

The  main  part  of  these  causes  is,  by  many  uTiters  on 
political  economy,  designated  broadly  under  the  general  term 
Custom.  Mill,  indeed,  goes  so  far  as  to  say  that  “ under  the 
“ rule  of  individual  property,  the  dhdsion  of  the  produce  is  the 
“ result  of  two  determining  agencies.  Competition  and  Custom.” 
And  if  we  leave  Combination^  and  Governmental  interference 
out  of  account,  and  take  Custom  in  one  comprehensive  sense,  the 

A As  1 have  before  observed,  combination,  though  opposed  to  competition  as 
the  term  is  ordinarily  used,  is  not  excluded  by  the  fundamental  assumptions  of 
the  theory  of  competitive  distribution. 


CHAP.  Xll 


CUSTOM 


387 


assertion  is  approximately  true : but  it  is  important  to  dis- 
tinguish the  very  different  motives  and  economic  forces  whose 
operation  is  thus  summed  up,  in  order  to  ascertain  clearly  how 
far  they  can  properly  be  said  to  conflict  with  Competition. 

In  the  first  place,  th^  word  Custom  is  commonly  used  to 
designate  two  quite  distinct  tendencies  of  human  nature : the 
tendency  to  do  what  one  has  done  before  and  the  tendency  to 
do  as  others  do.  Both  these  tendencies  equally  operate  to  pre- 
vent that  continual  modification  of  action  in  order  to  adapt  it 
to  the  continual  change  of  men’s  circumstances  and  oppor- 
tunities, which  is  required  to  realise  completely  the  greatest 
possible  economy  in  production,  and  the  scheme  of  distribution 
that  economic  science  contemplates.  Men  continually  get 
less  for  their  money,  goods,  or  services,  because  they  exchange 
them  not  in  the  best  market  but  in  the  market  they  have  been 
used  to  frequent ; and  they  continually  produce  less  than  they 
might  do  by  a given  amount  of  labour,  because  they  follow  not 
the  best  methods  that  have  been  invented  and  published  but 
the  methods  followed  by  their  neighbours.  At  the  same  time 
each  impulse  has  economic  effects  of  very  different  kinds  and 
blends  with  and  is  sustained  by  very  various  motives. 

To  obtain  a clear  view  of  these  it  vdll  be  well  to  denominate 
each  of  these  tendencies  separately.  For  convenience’  sake  we 
Avill  speak  of  the  former  as  Habit,  and  reserve  the  term  Custom 
to  the  latter  (though  by  the  usage  of  language  it  is  equally 
applicable  to  the  former). 

I will  begin  by  noticing  the  obvious  fact  that  bot)i  custom 
and  habit,  though  they  often  interfere  with  an  alert  and  vigilant 
pursuit  of  amelioration,  are  also  to  a great  extent  economically 
useful  in  saving  time  and  labour.  By  doing  what  he  has  done 
before,  or  what  others  do,  a man  avoids  the  necessity  of  deciding 
anew  on  each  occasion,  where  the  advantage  that  can  be  gained 
by  the  best  decision  is  not  worth  the  time  and  trouble  spent  in 
making  it.  Hence  the  Goodwill  of  a business  would  remain  a 
valuable  possession,  however  intelligently  all  purchasers  aimed 
at  the  maximum  of  economic  gain  in  their  purchases ; especially 
if  we  add  to  the  advantage  of  trouble  saved,  the  further  ad- 
vantage which  the  purchaser  of  any  commodity  obtains  through 
ifixed  habits  of  dealing,  in  a general  disposition  of  the  seller 
with  whom  he  deals  to  oblige  him. 


25—2 


388 


POLITICAL  ECONOMY 


BOOK  II 


Next,  in  explaining  the  obstacles  which  Habit  continually 
presents  to  the  adoption  of  economic  improvements,  we  must 
distinguish  between  the  mere  blind  adhesion  to  an  accustomed 
routine,  and  such  rational  aversion  to  the  expenditure  of  labour 
and  waste  of  acquired  dexterity  involved  in  learning  new 
processes  as  would  be  felt  by  the  most  perfectly  “ economic  ” 
mam 

Further,  so  far  as  the  breach  of  habit  involved  in  a change 
of  work  or  residence  causes  actual  discomfort,  it  is  possible  that, 
on  the  strictest  calculations  of  self-interest,  this  drawback  may 
outweigh  the  pecuniary  gain  that  would  result  from  the  adoption 
of  the  proposed  change.  The  ties  of  mere  association  formed 
by  a man’s  previous  life,  no  less  than  the  ties  of  social  or 
patriotic  affections,  constitute  an  economic  force  operating  to 
keep  a man  where  he  is,  the  action  of  which  is  in  no  way 
excluded  by  the  fundamental  assumptions  on  which  the  theory' 
of  competitive  distribution  proceeds. 

Finally,  it  should  be  observed  that  a man’s  habits  of  dealing 
are  frequently  sustained,  even  when  they  have  become  econo- 
mically disadvantageous  to  him,  through  his  sympathy  with  the 
expectations  that  they  have  excited  in  the  minds  of  others,  and 
the  disappointment  that  would  be  produced  if  they  were  dis- 
continued. For  the  tendency  to  do  what  one  has  hitherto  done 
has  its  counterpart  in  the  tendency  to  expect  to  be  treated  as 
one  has  hitherto  been  treated : and  the  breach  of  such  expecta- 
tions, if  the  loss  caused  by  it  is  considerable,  is  often  felt  to  be 
a hardship,  if  not  exactly  an  injustice,  even  in  cases  where  no 
legal  claim  could  be  based  upon  them ; so  that  moral  and 
sympathetic  motives  co-operate  in  preventing  such  a breach. 
Perhaps  the  most  conspicuous  effect  of  these  mingled  motives 
is  seen  in  the  case  of  domestic  servants ; men  continually  endure 
a moderate,  and  not  rarely  a large,  amount  of  incompetence  in 
an  old  servant  rather  than  inflict  the  hardship  of  dismissal ; and 
that  even  when  they  do  not  feel  any  special  affection  for  the 
person  thus  benefited. 

§ 2.  In  the  cases  just  mentioned  the  grievance  is  much 
greater,  and  the  motives  preventing  divergence  much  stronger, 
when  the  habitual  conduct  has  been  also  customary — in  the 
sense  in  which  I have  distinguished  this  term  from  “ habitual.” 
Customs  thus  operating  vary  indefinitely  in  usage  and  duration : 


CHAP.  XII 


CUSTOM 


389 


for  instance,  English  landlords  have  often  allowed  their  farms  to 
be  let  at  rents  below  the  market  rate,  merely  because  their  ances- 
tors— perhaps  only  their  fathers — did  so  before  them.  More 
widely-extended  customs  are  often  regarded  as  morally  binding 
even  where  they  do  not  carry  with  them  any  legal  obligation. 
It  is  thought  to  be  inequitable  to  refuse  to  pay  a man  what 
persons  of  his  class  usually  receive  for  a given  service,  or,  by 
taking  advantage  of  special  circumstances,  to  make  him  pay 
more  than  is  ordinarily  paid  for  any  service  that  he  receives. 
Indeed  when  a man  speaks  of  “ fair  wages  ” for  his  work  he 
often  seems  to  mean  no  more  than  customary  wages ; and  when 
he  complains  of  being  charged  “ extortionate  ” prices,  he  can 
only  defend  the  epithet  by  an  appeal  to  custom.  How  far  such 
an  appeal  is  founded  on  reason,  we  will  hereafter  consider : here 
we  need  only  observe  that  even  in  the  most  economically 
advanced  of  existing  communities,  material  divergences  from 
purely  competitive  distribution  are  to  be  referred  to  Custom 
consciously  or  unconsciously  determining  notions  of  equity;  while 
in  other  ages  and  countries  the  influence  of  this  principle  has 
predominated  so  much  over  that  of  Competition,  as  sometimes 
to  reduce  the  operation  of  the  latter  within  very  narrow  limits. 

It  is  to  be  observed,  however,  that  customs  determining 
remuneration  may  be  effective  without  assuming  the  dignity  of 
moral  rules.  For  instance,  the  customary  payment  of  fees  for 
certain  professional  services — such  as  those  of  physicians  and 
solicitors— is  not,  I think,  supported  by  any  general  sense  that 
the  sums  paid  are  just  what  the  services  in  question  are  fairly 
worth.  Rather,  as  I have  already  suggested,  the  effect  of 
custom  in  such  cases,  at  least  in  the  existing  condition  of  such 
a society  as  our  own,  blends  with  that  of  tacit  combination ; e.g., 
the  fact  that  it  is  customary  to  pay  a physician  a guinea  for 
his  professional  advice  tends  to  produce  a general  acquiescence 
in  the  charge,  which  it  is  the  interest  of  physicians  generally  to 
maintain  and  which  it  might  not  be  quite  so  easy  to  gain  for  a 
revised  tariff  of  fees ; and,  therefore,  unless  physicians  as  a body 
form  a decided  opinion  that  their  average  earnings  would  be 
increased  by  a different  charge,  the  existing  custom  is  not  likely 
to  be  disturbed.  Still,  if  it  appeared  to  be  clearly  the  interest 
of  physicians  as  a class  to  raise  or  lower  the  customary  fee,  it 
can  hardly  be  doubted  that*  the  union  of  the  profession  is 


390 


POLITICAL  ECONOMY 


BOOK  II 


sufficiently  strong  to  impose  such  a change  botli  on  the  public 
and  on  any  recalcitrant  members  of  their  oavti  body.  We  may 
say,  therefore,  that  the  existing  fee  is  determined  by  custom,  but 
under  the  condition  of  not  differing  materially  from  what  would 
be  deteiinined  by  express  combination. 

Again,  there  are  certain  customs  of  expenditure  which,  ivith- 
out  being  morally  obligatory,  are  yet  supported  by  effective  social 
sanctions ; so  that  the  breach  of  them  is  either  certain  or  likely 
to  be  a bar  to  employment,  or  at  any  rate  to  success,  in  certain 
callings,  or  otherwise  to  entail  pecuniary  loss.  The  obligations 
thence  arising  are  in  part  strictly  professional ; such,  for  example, 
as  the  necessity  of  wearing  a certain  dress : partly,  again,  they  are 
attached  to  the  social  grade  from  which  the  class  of  labourers  in 
question  is  chiefly  taken;  thus  a clerk  would  incur  disfavour  by 
wearing  the  dress  of  a mechanic ; a physician  would  not  succeed 
who  did  not  appear  to  live  in  a style  above  that  of  an  ordinar}- 
clerk ; it  is  even  considered  a part  of  the  duty  of  certain  highly 
paid  officials  to  give  costly  entertainments.  So  far  as  such 
customary  expenditure  is  generally  felt  to  be  burdensome,  it 
should  not  be  regarded  as  a part  of  the  spender’s  consumption, 
economically  speaking ; but  rather  as  a part  of  the  cost  of  pro- 
duction of  his  ser\dces,  which  will,  therefore,  tend  to  be  returned 
to  him  in  the  remuneration  received  for  them.  If,  however,  the 
custom  corresponds  to — and  is,  in  fact,  sustained  by — the  general 
tastes  and  inclinations  of  persons  of  the  social  grade  from  which  the 
labourers  in  question  are  chiefly  dra^ni,  it  will  only  tend  to  raise 
the  wages  of  such  labourers  so  far  as  it  constitutes  an  additional 
obstacle  to  the  competition  of  aspirants  from  the  grade  below. 

In  some  cases,  again,  the  neglect  of  received  customs  of  ex- 
penditure would  hardly  either  prevent  a man  from  obtaining 
work  of  a particular  kind,  or  detract  from  its  pecuniary  emolu- 
ments ; it  would  merely  diminish  his  share  of  the  social  consi- 
deration that  commonly  attaches  to  these  functions.  This  leads 
us  to  notice  that  the  actual  allotment  of  social  rank  to  different 
callings  itself  depends  to  a great  extent  on  the  stability  ot 
custom;  being  often  materially  different  from  the  allotment  that 
might  be  expected  to  result  from  an  intelligent  consideration  ot 
the  importance  of  different  social  functions,  or  ot  the  qualities 
required  for  their  efficient  performance.  At  the  same  time  this 
influence  of  custom,  however  iiTational  it  may  seem,  is  yet 


CHAP.  XII 


CUSTOM 


391 


a motive  force  which  an  intelligent  pursuer  of  private  interest 
cannot  disregard.  For  even  if  such  a person  were  so  exception- 
ally constituted  as  to  derive  no  immediate  satisfaction  from 
social  consideration,  he  could  hardly  fail  to  find  it  useful  indi- 
rectly in  various  ways. 

§ 3.  It  thus  appears  that  only  a part  of  the  great  and  varied 
infiuence  of  custom  can  be  regarded  as  a force  opposed  to  com- 
petition in  such  a way  that  the.  fuller  development  of  the  latter 
must  necessarily  diminish  it.  So  far  as  the  maintenance  of  fixed 
habits  of  dealing,  and  rates  of  remuneration  not  frequently 
changed,  leads  to  economy  of  time  and  labour,  the  development 
of  competition  has  of  course  no  tendency  to  modify  it.  So  far, 
again,  as  custom  determines  the  social  consideration  attaching 
to  certain  kinds  of  work,  or  imposes  certain  modes  of  outlay  as 
a condition  of  obtaining  such  consideration,  its  effects  should, 
I conceive,  be  treated  merely  as  a part  of  the  pre-existing 
social  circumstances  in  which  the  laws  of  competitive  distribu- 
tion are  supposed  to  operate.  Customs  in  this  latter  sense  may 
be  altered,  indeed  are  continually  being  altered  to  some  extent, 
by  the  progress  of  civilisation ; but  the  mere  development, 
intensive  and  extensive,  of  the  intelligent  pursuit  of  private 
interest  has  not  in  itself  an}"  tendency  to  alter  them.  Nor, 
again,  can  we  say  that  such  development  will  necessarily  tend 
to  obliterate  the  effect  of  customs  that  fix  the  money-price  of 
services,  so  far  as  they  are  really  supported  by  a veiled  or  tacit 
combination  of  the  persons  to  whom  they  are  profitable ; though 
it  will  probably  tend  to  strip  off  the  veil  and  render  the  com- 
bination open  and  avowed. 

There  remain  two  important  and  fundamentally  different 
ways  in  which  the  influences  of  custom  and  habit  undoubtedly 
counteract,  to  some  extent,  the  force  of  competition.  Firstly,  so 
far  as  the  mere  tendency  to  follow  use  and  wont  operates 
blindly,  without  consideration  of  the  consequent  gain  and  loss, 
its  force  combines  with  that  of  simple  inertia  and  carelessness 
in  diminishing— or,  still  more  often,  retarding — the  changes  in 
wages  or  prices  corresponding  to  changes  in  the  conditions  of 
industry,  which  competition  tends  to  bring  abouth  Secondly, 

1 It  is  solely  to  this  diminution  and  retardation  of  the  effects  of  competition 
by  the  mere  vU  inertiae  of  custom  that  I should  be  disposed  to  apply  the 
metaphorical  term  “friction,”  which  some  economists  have  used  more  vaguely 
and  widely. 


392 


POLITICAL  ECONOMY 


BOOK  II 


SO  far  as  men’s  sense  of  Justice  or  Fairness  is  consciously  or 
unconsciously  determined  by  Custom,  its  influence  may  be  con- 
sidered as  a part  of  the  aggregate  effect  of  moral  or  quasi-moral 
sentiments  in  modifying  the  competitive  distribution  of  produce, 
ies  the  sense  of  justice — which,  be  it  observed,  has  some- 
s acted  powerfully  in  a direction  opposed  to  use  and  wont — 
nay  note  patriotism,  philanthropy,  pity,  friendship,  re- 
ligion, and  other  forms  of  devotion  to  an  ideal,  as  emotional 
forces  that  come  in  various  ways  into  conflict  with  the  desire  of 
private  gain.  So  far,  indeed,  as  such  motives  merely  induce 
men  to  devote  income  or  time  and  energy  to  other  purposes 
than  those  of  private  enjoyment,  their  effects  need  not  be  in- 
cluded among  the  phenomena  with  which  economic  science  is 
concerned;  thus  almsgiving  of  all  kinds,  and  other  donations 
to  individuals  or  public  objects,  may  be  considered  as  consti- 
tuting a secondary  redistribution  of  wealth,  valuable  as  supple- 
menting the  defects  and  mitigating  the  rigours  of  the  primary 
competitive  distribution,  but  not  requiring  to  be  taken  into 
account  in  economic  reasonings,  except  in  special  cases  in  which 
it  influences  the  primary  distribution.  And  doubtless  moral 
sentiments  and  ideal  aims  do  actually  exercise  this  kind  of 
influence  in  certain  cases:  a certain  amount  of  the  labour  hum 
which  men  obtain  their  livelihood  is  performed  for  remuneration 
less  than  might  be  earned  in  some  work  no  more  fatiguing  or 
disagreeable,  from  a deliberate  postponement  of  the  labourer’s 
pecuniary  interests  to  other  aims.  I do  not,  however,  think  that 
the  effects  of  these  elevated  sentiments  in  modif}ing  the  action 
of  economic  forces  are  of  fundamental  importance  in  modem 
societies  as  they  actually  exist:  and  to  investigate  systematically 
the  probability  of  their  becoming  more  important  hereafter 
would -carry  us  beyond  the  scope  of  the  present  treatise  into  a 
study  of  the  general  history  of  society.  It  appears  to  me,  there- 
fore, that  what  I have  to  say  on  the  actual  relations  of  Morality 
and  Political  Economy  will  be  most  conveniently  said  in  con- 
nexion with  the  discussion,  to  which  we  are  now  to  proceed,  on 
the  principles  which  ought  to  regulate  the  economic  intervention 
of  Government. 


BOOK  III 


THE  ART  OF  POLITICAL  ECONOMY. 


W: 


f, 

t.' 


i 


i 

i 


i' 


CHAPTER  1. 


THE  ART  OF  POLITICAL  ECOXOMV. 

Ix  this  third  book  of  my  treatise  I propose  to  discuss  briefly 
the  principles  of  Political  Economy  considered  as  an  Art  or 
dejiartment  of  the  general  Theory  of  Practice.  It  has  been 
already  observed  h in  the  introductory  poition  of  this  woik,  that 
the  “ principles  of  Political  Economy  ” are  still  most  commonly 
understood,  even  in  England,  and  in  spite  of  many  protests  to 
the  contrary,  to  be  'practical  principles — rules  of  conduct  public 
or  private ; and  that,  this  being  so,  confusion  of  thought  on  the 
subject  is  likely  to  be  most  effectually  prevented,  not  by  con- 
fining the  Theory  of  Political  Economy  to  economic  science  in 
the  strictest  sense — the  study,  whether  by  a positive  or  a hypo- 
thetical treatment,  of  the  actually  existing  production  and 
distribution  of  valuable  commodities — but  by  marking  and 
maintaining  as  clearly  as  possible  the  distinction  between  the 
points  of  view  of  the  Science  and  the  Art  respectively,  and  the 
methods  of  reasoning  appropriate  to  each. 

How  then  shall  we  define  the  scope  of  Political  Economy 
considered  as  an  Art  ? 

If  we  follow  the  indications  of  language,  it  would  seem  to 
be  a branch  or  application  of  a more  general  art  called 
“ Economy  ” without  qualification.  Another  branch  of  this 
more  comprehensive  art  is  commonly  recognised  as  “ Domestic 
“ Economy  ” or  “ economy  in  household  mattei’s.”  Here  the 
object  with  which  the  economist  is  concerned  is  wealth  or 
money ; but  we  equally  speak  of  “ economy  of  force  ” in  a 
mechanical  arrangement  without  regard  to  its  utility,  and  of 
“ economy  of  time  ” in  any  employment  whether  productive 


' Introduction,  e.  ii.  § 1. 


396 


POLITICAL  ECONOMY 


BOOK  IK 


of  wealth  or  not.  Comparing  these  different  uses,  we  maj 
define  “ Economy  ” generally  as  the  art  or  method  of  attaining 
the  greatest  possible  amount  of  some  desirable  result  for  a 
given  cost,  or  a given  result  for  the  least  possible  cost ; “ cost  ” 
being  of  two  kinds,  either  (1)  the  endurance  of  pain,  discomfort, 
or  something  else  undesirable,  or  (2)  the  sacrifice  of  something 
desirable,  either  as  an  end  or  a means h 

The  Art  of  Political  Economy,  then,  would  seem  to  be 
Economy  applied  to  the  attainment  of  some  desirable  result 
not  for  an  indiridual  but  for  a political  community  (or  aggregate 
of  such  communities). 

3o  far  we  may  hope  to  avoid  controversy.  But  when  we  go 
ij  ask  what  the  desirable  result  is  which  Political  Economy 
seeks  to  realise,  we  find  the  question  less  easy  to  answer. 
It  has  already  been  noticed  ^ that  Adam  Smith  and  his 
earlier  successors,  so  far  as  they  treated  political  economy 
as  an  art,  conceived  its  end  to  be  that  the  national  'produc- 
tion of  wealth  should  be  as  great  as  possible ; and  hardly 
appear  to  have  entertained  the  notion  of  aiming  at  the  best 
possible  distribution.  But  this  limitation  of  view  is  not  in 
accordance  wdth  the  ordinary  use  of  the  wider  teiun  “ economy.” 
The  idea  of  an  economic  expenditure  of  wealth,  of  which  the 
aim  is  to  make  a given  amount  of  wealth  as  useful  as  possible, 
is  even  more  familiar  than  that  of  economic  production  of 
wealth : in  fact  domestic  economy,  as  ordinarily  understood, 
is  simpl}'  the . art  or  faculty  of  “ making  wealth  go  as  far  as 
ble.”  And  it  seems  most  in  harmony  with  the  received 
n of  economic  science,  adopted  in  the  present  treatise,  to 
■ jj.  ise  at  least  a possible  Aft  of  Distribution,  of  which  the 
aim  is  to  apportion  the  produce  among  the  members  of  the 
community  so  that  the  greatest  amount  of  utility  or  satisfaction 
may  be  derived  from  it. 

It  may  be  said  that  this  latter  inquiry  takes  us  beyond 
the  limits  that  properly  separate  Political  Economy  from  the 

r I have  before  urged  that  labour  is  not  necessarily  to  be  regarded  as  some- 
thing disagreeable;  all  that  we  can  infer  from  the  fact  that  any  kind  of  labour 
has  to  be  paid  for  is  that  some,  out  of  the  whole  number  of  persons  required  to 
furnish  all  the  labour  that  society  is  prepared  to  purchase,  either  dislike  this 
labour  or  prefer  some  other  kind  of  labour  either  for  its  own  sake  or  for 
its  results. 

Introduction,  c.  ii.  § 4. 


CHAP.  I 


THE  ART  OF  POLITICAL  ECONOMY 


397 


more  comprehensive  and  more  difficult  art  of  general  Politics ; 
since  it  inevitably  carries  us  into  a region  of  investigation  in 
which  we  can  no  longer  use  the  comparatively  exact  measure- 
ments of  economic  science,  but  only  those  more  vague  and 
uncertain  balancings  of  different  quantities  of  happiness  with 
which  the  politician  has  to  content  himself  But  the  discus- 
sions in  Book  i.  on  the  definitions  of  wealth  and  value  seemed 
to  lead  to  the  conclusion  that  the  real  exactness  of  economic 
as  compared  wuth  ordinary  political  estimates  is  generally  over- 
rated. For  it  there  appeared  that,  though  we  could  measure 
all  wealth  at  the  same  time  and  place  by  the  ordinary  standard 
of  exchange  value, — i.e.,  money, — still  in  comparing  amounts  of 
wealth  at  different  times  and  places  neither  this  nor  any 
equally  exact  standard  was  available ; and  we  were  accordingly 
obliged  to  some  extent  to  fall  back  on  a necessarily  more 
indefinite  comparison  of  utilities.  Since,  then,  even  in  the 
reasonings  of  economic  science,  an  estimate  of  the  utility  of 
wealth  is  to  some  extent  indispensable,  no  fundamental  change 
of  method  is  introduced  by  adopting  this  estimate  more  sys- 
tematically in  the  present  part  of  our  investigation. 

It  may,  however,  be  questioned  whether,  so  far  as  we  regulate 
the  distribution  of  produce,  we  should  do  so  on  the  principle 
that  I have  laid  down  as  “ economic.”  Many  would  urge  that 
we  ought  to  aim  at  realising  Justice  or  Equity  in  our  distribu- 
tion. Hence  it  seems  desirable  to  examine  the  principles  of 
Justice  or  Equity  that  have  been  proposed  as  supreme  rules  of 
distribution : and,  so  far  as  any  such  principles  approve  them- 
selves on  examination,  to  consider  how  far  their  application 
would  coincide  with,  and  how  .far  it  would  diverge  from,  the 
pursuit  of  the  “ economic  ” ideal. 

Meanwhile  we  may  take  the  subject  of  Political  Economy 
considered  as  an  Art  to  include,  besides  the  theory  of  pi-ovision 
for  governmental  expenditure,  (1)  the  art  of  making  the 
proportion  of  produce  to  population  a maximum,  taking  gene- 
rally as  a measure  the  ordinary  standard  of  exchange  value,  so 
far  as  it  can  be  applied : and  (2)  the  art  of  rightly  distributing 
produce  among  members  of  the  community,  whether  on  any 
principle  of  equity  or  justice,  or  on  the  economic  principle  of 
making  the  whole  produce  as  useful  as  possible. 

Here,  however,  it  may  be  asked,  whose  conduct  the  Art  is 


398 


POLITICAL  ECONOMY 


BOOK  III 


supposed  to  direct ; and  some  further  explanation  on  this  point 
seems  certainly  to  be  required.  First,  as  regards  production, 
— the  term  “ ait  of  production  ” might  be  fairly  understood  to 
denote  a systematic  exposition  of  the  rules,  bj^  conforming  to 
which  individuals  engaged  in  industry  may  produce  the  maxi- 
mum of  commodity  with  the  minimum  of  cost.  But  political 
economy  is  not  usually  supposed  to  include  such  an  exposition ; 
and  it  appears  to  me  that  it  would  be  difficult  to  give  any 
general  instruction  of  this  kind,  if  it  is  to  be  more  than  a collec- 
tion of  common -places,  without  entering  more  fully  than  would 
be  convenient  into  the  details  of  particular  kinds  of  industry. 
At  any  rate  I do  not  propose  to  attempt  this  in  the  present 
■-k ; I shall  follow  tradition  in  treating  as  the  main  subject  of 
cal  Economy,  regarded  as  an  Art  of  Production,  the  action 
vemment  for  the  improvement  of  the  national  production : 
but  it  seems  desirable,  for  completeness,  to  include  in  our  con- 
sideration the  action  of  private  persons  for  the  same  end,  so  far 
as  it  is  not  prompted  by  the  ordinary  motives  of  pecuniary  self- 
interest  or  regulated  on  commercial  principles.  This  extension 
of  view  is  still  more  clearly  called  for  in  dealing  with  the  Art  of 
Distribution ; where  gratuitous  labour  and  expenditure  have, 
especially  in  modern  times,  largely  supplemented  the  efforts  of 
governments  to  mitigate  the  distressing  inequalities  in  the 
di.stribution  of  produce,  that  are  incidental  to  the  existing 
competitive  organisation  of  society. 

Finally,  I have  to  observe  that,  in  defining  the  scope  of 
the  art  of  production,  I have  implied  that  the  mere  increase 
of  population  is  not  an  end  at  which  it  aims.  This  is.  I think, 
now  the  generally  accepted  view  of  political  economists.  A 
statesman,  however,  will  generally  desire,  ceteris  paribus,  a 
large  population  for  his  country ; and  we  shall  find  that  some 
important  kinds  of  governmental  interference  wth  industry — 
such  as  the  regulation  of  land-tenure — have  been  partly  ad- 
vocated with  a view  to  increase  of  population  rather  than  of 
wealth.  I propose,  therefore,  in  one  or  two  cases  to  consider  the 
effects  of  governmental  interference  in  relation  to  this  end. 


CHAPTER  II. 


THE  SYSTEM  OF  NATURAL  LIBERTY  CONSIDERED  IN  RELATION 
TO  PRODUCTION. 

I 1.  On  the  very  threshold  of  the  subject  . of  inquiry 
defined  in  the  preceding  chapter  we  find  ourselves  confronted 
by  the  sweeping  doctrine  that  the  sole  function  of  an  ideal 
government  in  relation  to  industry  is  simply  to  leave  it  alone. 
This  view  seems  to  be  partly  supported  in  some  minds  by  a 
curious  confusion  of  thought ; the  absence  of  governmental 
interference  being  assumed  for  simplicity’s  sake  in  the  hypo- 
thetical reasonings,  by  which  the  values  of  products  and  services 
are  deductively  determined,  is  at  the  same  time  vaguely  re- 
garded as  a conclusion  established  by  siich  reasonings.  Still 
when  modern  Political  Economy — according  to  the  common 
view  of  its  commencement  as  a special  science  or  study — was 
founded  by  the  “ Physiocrats  ” in  the  middle  of  the  eighteenth 
century,  it  was  an  essential  part  of  its  teaching  that  a 
statesman’s  business  was  not  to  ihake  laws  for  industry,  but 
merely  to  ascertain  and  protect  from  encroachment  the  simple, 
eternal,  and  immutable  laws  of  nature,  under  which  production 
would  regulate  itself  in  the  best  possible  way,  if  governments 
would  abstain  from  meddling.  And  from  this  time  forward, 
under  the  more  enduring  influence  of  Adam  Smith,  the 
accredited  expositors  of  political  economy — at  least  until  the 
comparatively  recent  movement  against  individualism  in 
Germany — have  commonly  been  advocates  of  Laisser  Faire. 
Hence  since  this  doctrine,  so  far  as  it  is  sound,  is  evidently  the 
most  important  conclusion  of  Political  Economy  considered  as 


400 


POLITICAL  ECONOMY 


BOOK  m 


an  Art,  it  will  be  convenient  to  begin  this  department  of  our 
investigation  by  examining  carefully  the  grounds  on  which  it  is 
advocated. 

Throughout  this  examination  it  is  desirable,  for  clearness’ 
sake,  to  keep  distinct  the  two  points  of  view  which  we  have 
taken  separately  in  the  two  preceding  books.  For  the  pro- 
p„sit’on  that  what,  after  Adam  Smith,  I shall  call  “natural 
“ liberty  ” tends  to  the  most  economic  production  of  wealth, 
by  no  means  necessarily  implies  the  further  proposition  that  it 
also  tends  to  the  most  economic  or  equitable  distribution  of 
the  aggregate  produce.  It  was  no  doubt  held  by  the 
Physiocrats  that  Natural  Liberty  tends  to  realise  Natural 
Justice ; and  the  same  view  has  been  commonly  maintained 
by  the  more  thoroughgoing  followers  of  Adam  Smith*  in 
France  and  Germany, — of  whom  Bastiat  may  be  taken  as 
a type, — and  has  been  frequently  expressed  or  implied  in 
the  utterances  of  subordinate  members  of  the  “ Manchester 
“ School  ” in  England.  But  I am  not  aware  that  it  has  been 
expressly  affirmed  by  any  leading  economic  writer  in  England 
from  Ricardo  downwards ; and  since  the  influence  of  J.  S.  Mill 
has  been  predominant,  I do  not  think  it  has  been  the  pre- 
vailing opinion  even  among  the  rank  and  file  of  the  “ orthodox  ” 
school  of  political  economy.  Many,  at  any  rate,  of  those, 
who  in  England  have  held  most  strongly  that  it  is  expedient 
lb.'  f ovemment  to  interfere  as  little  as  possible  wdth  the 
bution  of  wealth  resulting  from  free  competition,  have 
•aintained  this  on  the  ground  that  the  existing  inequalities 
are  satisfactory’ ; but  rather  in  the  belief  that  any  such  inter- 
ference must  tend  to  impair  aggregate  production  more  than 
it  could  increase  the  utility  of  the  produce  by  a better  dis- 
tribution. 

It  will  be  convenient,  therefore,  to  commence  with  an 
examination  of  the  arguments  by  which  the  system  of  Natural 
Liberty  is  justified  in  its  relation  to  Production.  The  following 
is  a concise  statement  of  the  reasoning  to  this  conclusion  which 
is  more  or  less  definitely  implied,  and  partly  expressed,  in 
numberless  passages  of  the  works  of  Adam  Smith  and  his 
successors. 


* For  Adam  Smith’s  own  view,  see  Introduction,  pp.  20,  21. 


CHAP.  II 


SYSTEM  OF  NATURAL  LIBERTY 


401 


Assuming  as  universal  a fairly  intelligent  and  alert  pursuit 
of  the  interest  of  self  and  family,  it  is  argued  that  wealth  and 
other  purchasable  commodities  will  be  produced  in  the  most 
economic  way,  if  every  member  of  society  is  left  free  to  produce 
and  transfer  to  others  whatever  utilities  he  can,  on  any  terms 
that  may  be  freely  arranged. 

For  (1)  the  regard  for  self-interest  on  the  part  of  consumers 
will  lead  always  to  the  effectual  demand  for  the  things  that  are 
most  useful  to  society;  and  (2)  regard  for  self-interest  on  the 
part  of  producers  will  lead  to  their  production  at  the  least  cost. 
That  is,  firstly,  if  any  material  part  of  the  ordinary  supply  of 
any  commodity  A were  generally  estimated  as  less  useful  for 
the  satisfaction  of  social  needs  than  the  quantity  of  anothei- 
commodity  B that  could  be  produced  at  the  same  cost,  the 
demand  of  consumers  would  be  diverted  from  A to  B,  so  that 
A would  fall  in  market  value  and  B rise ; and  this  change 
in  values  would  cause  a diversion  of  the  efforts  of  producers 
from  A to  i?  to  the  extent  required.  And,  secondly,  the 
self-interest  of  producers  will  tend  to  the  production  of  every- 
thing at  the  least  cost ; for  the  self-interest  of  entre'preneurs 
will  lead  them  to  purchase  services  most  cheaply,  taking 
account  of  quality : and  the  self-interest  of  labourers — in- 
cluding its  expansion,  through  parental  affection,  into  domestic 
interest — will  cause  them  to  be  trained  to  the  performance  of 
the  best-paid,  and  therefore  most  useful,  services  for  which  they 
are,  or  are  capable  of  becoming,  adapted ; so  far  as  the  cost  of 
the  training  does  not  outweigh  the  increment  of  efficiency  given 
by  it.  Any  excess  of  labourers  of  any  kind  will  be  rapidly 
corrected  by  a fall  in  the  payment  made  for  their  services ; and, 
in  the  same  way,  any  deficiency  will  be  rapidly  made  up.  And 
the  more  keenly  and  persistently  each  individual — whether  as 
consumer  or  as  producer — pursues  his  private  interest,  the 
more  certain  will  be  the  natural  punishment  of  inertia  or 
misdirected  effort  anywhere,  and  therefore  the  more  com- 
pletely will  the  adaptation  of  social  labour  to  the  satisfaction 
of  social  wants  be  attained.  What  has  been  said  applies 
primarily  to  ordinary  buying  and  selling ; but  it  may  obvious!}' 
be  extended  to  borrowing  and  lending,  hiring  and  letting — 
and,  in  short,  to  all  contracts  in  which  any  exchange  of  utilities 
takes  place : the  only  thing  required  of  government  in  any 
s.  p.  E.  26 


402 


POLITICAL  ECONOMY 


III 


^uch  case  is  to  secure — by  the  protection  of  person 
perty  from  force  and  fraud,  and  by  the  enforcement  of  freely 
made  contracts — that  everyone  shall  be  really  free  to  purchase 
the  utility  he  most  wants,  and  to  transfer  what  he  can  best 
furnish. 

This  conception  of  the  single  force  of  self-interest,  creating 
: i keeping  in  time  economic  order  the  vast  and  complex 
" ’""'ic  of  social  industry,  is  very  fascinating ; and  it  is  not 
suqirising  that,  in  the  first  glow  of  the  enthusiasm  excited 
by  its  revelation,  it  should  have  been  unhesitatingly  accepted 
as  presenting  the  ideal  condition  of  social  relations,  and  the  final 
goal  of  political  progress.  And  I believe  that  the  conception 
cf)ntains  a very  large  element  of  truth : the  motive  of  self- 
interest  does  work  powerfully  and  continually  in  the  manner 
above  indicated ; and  the  difficulty  of  finding  any  adequate 
substitute  for  it,  either  as  an  impulsive  or  as  a regulating 
force,  is  an  almost  invincible  obstacle  in  the  way  of  recon- 
structing society  on  any  but  its  present  individualistic  basis. 
At  the  same  time,  before  we  accept  the  system  of  natural 
liberty  as  suppling  the  Uq^e  to  which  a practical  politician 
should  seek  to  approximate,  it  is  important  to  obtain  a clear 
view  of  the  general  qualifications  with  which  the  argument 
above  given  has  to  be  accepted,  and  of  the  particular  cases  in 
which  its  o]jtimistic  conclusion  is  inadmissible. 

§ 2.  I propose,  therefore,  in  the  present  chaiJter,  to  concen- 
trate attention  on  these  qualifications  and  exceptions.  And, 
in  so  doing,  I think  it  will  be  most  instructive  to  adhere,  in  the 
main,  to  the  abstract  deductive  method  of  treatment  which 
has  been  chiefly  employed  in  the  preceding  Book ; since  many 
persons  who  are  willing  to  admit  that  the  principle  of  laisser 
faire  ought  not  to  be  applied  unreservedly  in  the  actual  con- 
dition of  human  societies,  yet  seem  to  suppose  it  to  be  demon- 
strably right  in  the  hypothetical  community  contemplated  in 
the  general  reasonings  of  political  economy.  This  supposition 
appears  to  me  seriously  erroneous ; hence  in  the  present 
chapter  I am  specially  concerned  to  shew  that,  even  in  a society 
tMjinposed — solely  or  mainly’ — of  “ economic  men,”  the  system 
of  natural  liberty  would  have,  in  certain  respects  and  under 

‘ The  difference  between  “solely”  and  “mainly”  is  important  in  a part  of 
the  argument  that  follows.  See  p.  410. 


CHAP.  II 


SYSTEM  OF  NATUKAL  LIBEETY 


403 


certain  conditions,  no  tendency  to  realise  the  beneficent  results 
claimed  for  it\ 

I may  begin  by  pointing  out  that  the  argument  for  laisser 
faire  does  not  tend  to  shew  that  the  spontaneous  combination 
of  individuals  pursuing  their  private  interests  will  lead  to  the 
production  of  a maximum  of  material  wealth,  except  so  far  as 
the  individuals  in  question  prefer  material  wealth  to  utilities  not 
embodied  in  matter.  So  far  as  their  choice  falls  on  the  latter — 
so  far  (e.g.)  as  the  wealthier  among  them  prefer  the  opera  and 
the  drama  to  the  arts  of  painting  and  sculpture,  and  a greater 
abundance  of  servants  to  a greater  elaborateness  in  food, 
clothing,  and  ornaments — the  result  of  their  free  action  will  be 
to  render  the  production  of  material  wealth  less  than  it  would 
otherwise  be.  And  even  taking  “ produce,”  as  I propose  to  do, 
in  the  wider  sense  in  which  it  has  been  taken  in  the  preceding 
Books,  to  include  immaterial  utilities  as  well  as  material,  we 
have  still  to  observe  that  men  may  prefer  repose,  leisure, 
reputation,  &c.,  to  any  utilities  ivhatever  that  they  could 
obtain  by  labouring.  Thus  the  freeing  of  a servile  population 
may  cause  a large  diminution  of  production  (in  the  widest  sense 
of  the  term);  because  the  freedmen  are  content  with  what  they 
can  get  by  a much  smaller  amount  of  labour  than  their  masters 
forced  them  to  perform.  In 'short  “natural  liberty”  can  on 
tend  to  the  production  of  maximum  wealth,  so  far  as  this  f 
more  satisfaction  on  the  whole  than  any  other  employmeni  of 
time. 

The  importance  of  both  these  qualifications  becomes  more 

1 It  is  from  this  point  of  view  that  Cairnes’s  interesting  and  persuasive  essay 
on  “Political  Economy  and  Laissez  Faire”  (in  his  Essays  in  Political  Economy 
Theoretical  and  Applied)  appears  to  me  most  defective.  Cairnes  reaches  the 
conclusion  that  laissez  faire,  though  the  safest  “practical  rule,”  yet  “falls 
“ to  the  ground  as  a scientific  doctrine,”  by  pointing  to  actual  shortconangs 
in  the  production  and  distribution  of  social  utility,  and  tracing  these  to  the 
mistaken  notions  that  men  form  of  their  interests.  But  this  reasoning  seems 
to  me  palpably  inconclusive,  according  to  the  view  of  political  economy  as  a 
hypothetical  science,  which  Cairnes  elsewhere  expounds  {Loyical  Method  of 
Political  Economy,  Lect.  ii.).  What  on  this  view  he  has  to  prove  is  that 
there  is  any  less  reason  for  regarding  laissez  faire  as  a doctrine  of  this  hypo- 
thetical science  than  there  is  for  so  regarding  those  deductive  determinations  of 
the  values  of  products  and  services  which  might  equally  well  be  shewn  not 
to  correspond  exactly — nor,  in  all  cases,  even  approximately — to  the  actual 
facts  of  existing  societies.  This,  then,  is  the  point  to  which  I chiefly  direct 
attention  in  the  present  chapter. 


26—2 


404 


POLITICAL  ECONOMY 


BOOK  III 


<dlear  when  they  are  viewed  in  connexion  with  a third.  In 
the  abstract  argument,  by  which  the  system  of  natural  liberty 
is  shewn  to  lead  to  the  most  economic  production,  it  has  to  be 
implicitly  assumed  that  all  the  different  parts  of  produce  are 
to  be  measured,  at  any  one  time  and  place,  by  their  exchange 
value*.  That  is,  we  have  to  assume,  that  utihties  valued 
highly  by  the  rich  are  useful  to  the  community  in  proportion 
either  to  their  market  price,  or  to  the  pecuniar}"  gain  foregone 
in  order  to  obtain  them.  And  among  these  utihties,  as  we 
have  just  seen,  we  must  include  the  gratification  of  the  love  of 
power,  the  love  of  ease,  and  all  the  whims  and  fancies  that  are 
w’ont  to  take  possession  of  the  minds  of  persons  whose  income 
is  far  more  than  sufficient  to  satisfy  ordinary’  human  desires. 
It  is  only  by  this  strained  extension  of  the  idea  of  social  utility 
that  the  production  of  such  utility  under  the  system  of  natural 
liberty  can  be  said  to  have  even  a general  tendency  to  reach 
the  maximum  production  possible.  Thus,  for  instance,  there  is 
eason  why,  even  in  a community  of  most  perfectly  economic 
, a few  wealthy  landowmers,  fond  of  solitude,  scenery,  or 
• t,  should  not  find  their  interest  in  keeping  from  cultiv"ation 
large  tracts  of  land  naturally  fit  for  the  plough  or  for  pasture ; 
or  why  large  capitalists  generally  should  not  prefer  to  live  on 
the  interest  of  their  capital,  w'ithout  producing  personally  any 
utilities  whatsoever. 

The  waste  of  social  resources  that  might  result  in  this  way 
is  likely  to  be  greater  the  nearer  a man  approaches  the  close 
of  life,  so  far  as  we  suppose  self-interest  to  be  his  governing 
principle  of  action.  Unless  he  is  sympathetic  enough  to  find 
his  greatest  happiness  in  beneficence,  it  may  clearly  be  his 
interest,  as  his  end  draws  near,  to  spend  larger  and  larger  sums 
■on  smaller  and  smaller  enjojunents.  Or  if  we  may  legitimately 
assume,  as  political  economists  generally  do,  that  a man  will 
generally  wish  at  least  to  keep  his  capital  intact  for  the  sake 
of  his  descendants,  we  still  have  no  ground  for  making  any 
similar  general  assumption  in  the  case  of  persons  unmarried  or 
childless.  Such  persons,  again,  even  if  they  do  not  spend 
their  accumulations  on  themselves,  may  (and  not  unfrequently 

’ A certain  margin  of  uncertainty  is  introduced,  so  far  as  the  interference  of 
government  has  any  effect  in  altering  exchange-value.  But  this,  for  our 
present  purposes,  may  be  neglected. 


CHAP.  II 


SYSTEM  OF  NATURAL  LIBERTY 


405 


do)  make  an  almost  equally  uneconomical  disposal  of  them 
by  whimsical  or  ill-judged  bequests.  And  this  leads  me  to 
another  difficulty  that  stands  in  the  way  of  the  consistent  reali- 
sation of  the  system  of  natural  liberty,  if  extended  to  include 
freedom  of  bequest.  Granting  that  men  in  general  will  extract 
most  satisfaction  out  of  their  wealth  for  themselves,  if  they 
are  allowed  to  choose  freely  the  manner  of  spending  it;  it 
does  not  in  any  way  follow  that  they  will  render  it  most 
productive  of  utility  for  those  who  are  to  come  after  them,  if 
they  are  allowed  to  bequeath  it  under  any  conditions  that 
they  choose.  On  the  contrary,  it  rather  follows  that  any  such 
posthumous  restraint  on  the  use  of  bequeathed  wealth  will 
tend  to  make  it  less  useful  to  the  living,  as  it  will  interfere 
with  their  freedom  in  dealing  with  it.  How  far  it  would, 
therefore,  be  generally  useful  to  impose  restrictions  on  bequest 
is  a question  which  can  only  be  decided  by  a balance  of  con- 
flicting considerations ; we  have  to  weigh  the  gain  of  utility 
that  may  be  expected  from  the  greater  freedom  of  the  heirs 
against  the  loss  of  utility  that  may  be  feared,  not  so  much 
through  the  diminution  in  the  satisfactions  of  the  testator — 
which  perhaps  heed  not  be  highly  estimated — but  from  his 
diminished  inducement  to  produce  and  preserve  wealth.  But 
however  this  question  may  be  decided,  the  theoretical  dilemma 
in  which  the  system  of  natural  liberty  is  placed  is  none  the  less 
clear.  The  free  play  of  self-interest  can  only  be  supposed 
to  lead  to  a socially  advantageous  employment  of  wealth  in  old 
age,  if  we  assume  that  the  old  are  keenly  interested  in  the  uti- 
lities that  their  wealth  may  furnish  to  those  who  succeed  them : 
but  if  they  have  this  keen  ijiterest,  they  will  probably  wish  to 
regulate  the  employment  of  their  wealth ; while  again  in  pro- 
portion as  they  attempt  this  regulation  by  will,  they  will 
diminish  the  freedom  of  their  successors  in  dealing  with  the 
wealth  that  they  bequeath ; and,  therefore,  according  to  the 
fundamental  assumption  of  the  system  of  natural  liberty,  will 
diminish  the  utility  of  this  wealth  to  those  successors.  Of  this 
difficulty  there  is,  I think,  no  theoretical  solution ; it  can  only 
be  settled  by  a rough  practical  compromise. 

A somewhat  similar  difficulty  arises  in  respect  of  the  en- 
forcement of  contracts.  If  all  contracts  freely  made  are  to  be 
enforced,  it  is  conceivable  that  a.  man  may  freely  contract 


406 


POLITICAL  ECONOMY 


BOOK  III 


himself  into  slavery ; it  is  even  conceivable  that  a large  mass  of 
the  population  of  a country  might  do  this,  in  the  poverty  and 
distress  caused  by  some  wide-spreading  calamity.  In  such 
a case  Freedom  of  Contract  would  have  produced  a social 
state  in  which  Freedom  of  Contract  would  be  no  longer  al- 
lowed to  large  numbers ; and,  therefore,  its  effect  in  keeping 
production  economic  would  be  corre.spondingly  restricted.  It 
may  be  said  that  such  contracts  would  not  really  be  in  the 
interest,  of  the  enslavers ; and  it  is  no  doubt  true  that,  according 
to  the  fundamental  h^'pothesis  that  we  are  now  considering,  it 
cannot  be  J.’s  interest  to  make  a contract  with  B which  will 
tend  to  diminish  5’s  pro.spective  utility  to  A,  taking  everj-- 
thing  into  account.  It  is,  however,  possible  that  the  most 
valued  utility  which  B can  provide  for  A is  the  gratification  of 
the  love  of  power  or  superiority  which  A will  obtain  by  a more 
complete  control  over  B ] .so  that  it  will  be  J.’s  interest  to 
obtain  this  control  at  the  cost  of  rendei’ing  B's  labour  less  pro- 
ductive— in  any  ordinary  sense  of  the  term.  And,  again,  it  ma}' 
be  possible  for  A to  make  a contract  which,  though  it  will  tend 
to  diminish  5’s  productive  efficiency  on  the  whole,  will  tend  in 
a greater  degree  to  increase  A’s  prospect  of  securing  to  himself 
the  results  of  this  efficiency:  and,  if  so,  A’s  self-interest  wall 
clearly  prompt  to  such  a contract. 

§ 3.  This  last  possibility  brings  us  in  view  of  another 
fundamental  assumption  of  the  system  of  natural  liberty,  the 
limited  applicability  of  which  it  is  both  theoretically  and 
practically  important  to  notice  In  the  general  argument  above 
given  it  was  implicitl}'  assumed  that  the  individual  can  always 
obtain  through  fi'ee  exchange  adequate  remuneration  for  the 
services  which  he  is  capable  of  rendering  to  societv.  But  there 
is  no  general  reason  for  supposing  that  this  \rill  always  be 
possible ; and  in  fact  there  is  a large  and  varied  class  of  cases  in 
which  the  supposition  would  be  manifestly  eri-oneous.  In  the 
first  place,  there  are  some  utilities  which,  from  their  nature,  are 
practically  incapable  of  being  appropriated  by  those  who  pro- 
duce them  or  who  would  otherwise  be  willing  to  purchase  them. 
For  instance,  it  may  easily  hajipen  that  the  benefits  of  a well- 
placed  lighthouse  must  be  large  1}'  enjoyed  by  ships  on  which  no 
toll  could  be  conveniently  imposed.  So,  again,  if  it  is  economic- 
ally advantageous  to  a nation  to  keep  up  forests,  on  account  of 


CHAP.  II 


SYSTEM  OF  NATURAL  LIBERTY 


407 


their  beneficial  effects  in  moderating  and  equalising  rainfall*, 
the  advantage  is  one  which  private  enterprise  has  no'  tendency 
to  provide ; since  no  one  could  appropriate  and  sell  improve- 
ments in  climate.  For  a somewhat  different  reason  scientific 
discoveries,  again,  however  ultimately  profitable  to  industry, 
have  not  generally  speaking  a market  value : the  inventions  in 
which  the  discoveries  are  applied  can,  indeed,  be  protected  by 
patents;  but  the  extent  to  which  any  given  discovery  will  aid 
invention  is  mostly  so  uncertain,  that,  even  if  the  secret  of 
a law  of  nature  could  be  conveniently  kept,  it  would  not  be 
worth  an  inventor’s  while  to  buy  it,  in  the  hope  of  being 
able  to  make  something  of  it. 

Here  I may  notice  a specially  important  way  in  which  the 
inequalities  in  distribution — which  natural  liberty  has  no 
manifest  tendency  to  diminish — may  react  unfavourably  on 
production.  So  far  as  the  most  economic  production  involves 
present  outlay  for  remote  results,  it  may  be  prevented  by  the 
fact  that  the  persons  concerned  do  not  possess  and  cannot  pro- 
cure the  requisite  capital;  while  for  others  who  do  possess  it, 
such  outlay  would  not  be  remunerative,  owing  to  the  difficulty 
of  appropriating  an  adequate  share  of  the  resulting  increment 
of  utility.  In  the  preceding  Book  we  have  been  led  to  observe 
how  the  services  of  the  higher  grades  of  skilled  labour,  including 
the  labour  of  large  employers,  tend  to  be  paid  more  highly  than 
would  be  the  case  if  wealth  were  more  equally  distributed. 
But  this  result  is  also  primd  facie  evidence  that  such  services 
are  rendered  less  abundantly  than  would  be  the  case  if  the 
labour  and  capital  of  the  community  were  most  productively 
employed : since  it  may  be  inferred  that  society  would  purchase 
an  additional  increment  of  such  services  at  a price  more  than 
sufficient  to  repay  the  outlay  necessary  to  provide  them ; 
while  at  the  same  time  it  would  not  be  profitable  for  any 
capitalist  to  provide  the  money,  with  the  view  of  being  repaid 
out  of  the  salary  of  the  labourer  educated,  owing  to  the  trouble 
and  risk  involved  in  the  deferred  payments.  In  this  way  it 
may  be  profitable  for  the  community  to  provide  technical  and 
professional  education  at  a cheap  rate,  even  when  it  could  not 
be  remuneratively  undertaken  by  private  enterprise.  And  thus, 
too,  the  low  wages  of  a depressed  class  of  labourers  may  cause 

* Cf.  Ran-Wagner,  Finaiizwissenschaft,  1*"  Theil,  § 193. 


408 


POLITICAL  ECONOMY 


BOOK  III 


a loss  of  wealth  to  the  community,  from  the  low  standard  of 
efficiency  which  they  tend  to  perpetuate  in  the  class,  even  when 
it  would  not  be  the  interest  of  any  private  employer  of  the 
labourers  in  question  to  pay  higher  wages. 

I 4.  On  the  other  hand,  private  enterprise  may  sometimes 
be  socially  uneconomical  because  the  undertaker  is  able  to 
appropriate  not  less  but  more  than  the  whole  net  gain  to  the 
community  tf  his  enterprise ; for  he  may  be  able  to  appro- 
priate the  main  part  of  the  gain  of  a change  causing  both 
gain  and  loss,  while  the  concomitant  loss  falls  entirely  upon 
others.  Thus  a company  A having  made  an  expensive  per- 
manent instrument — say  a railway — to  the  advantage  both  of 
themselves  and  of  their  fellow-citizens,  it  may  be  the  interest  of 
another  company  B to  make  a new  railway  somewhat  more 
convenient  for  the  majority  of  travellers^and  so  likely  to  draw 
the  lion’s  share  of  traffic  from  A — even  if  the  increment  of 
utility  to  the  community  is  outweighed  by  the  extra  cost  of 
the  new  railway;  since  B will  get  paid  not  merely  for  this 
increment  of  utility,  but  also  for  a large  part  of  the  utility 
that  A before  supplied. 

A still  more  marked  divergence  between  private  interest  and 
public  interest  is  liable  to  occur  in  the  case  of  monopoly : since, 
as  we  have  seen,  a monopolist  may  increase  his  maximum  net 
profit  or  make  an  equal  profit 'more  easily,  by  giving  a smaller 
supply  of  the  commodity  in  which  he  deals  at  a higher  price 
rather  than  a larger  supply  at  a lower  price,  and  so  rendering 
less  service  to  the  community  in  return  for  his  profit.  At  the 
same  time,  though  a monopoly  in  private  hands  is  thus  liable  to 
be  economically  disadvantageous  from  a social  point  of  view, 
there  is  in  certain  cases  a decided  economic  gain  to  be  obtained 
by  that  organisation  of  a whole  department  of  production  under 
a single  management,  which  inevitably  leads  to  monopoly ; 
either  because  the  qualities  required  in  the  product  are  such  as 
unity  of  management  is  peculiarly  qualified  to  pro\'ide — as  in 
the  case  of  the  medium  of  exchange — or  merely  from  the  saving 
of  labour  and  capital  that  it  renders  possible.  And  it  may  be 
observed  that  cases  of  this  kind  tend  to  increase  in  number  and 
importance,  as  civilisation  progresses  and  the  arts  -of  industry 
become  more  elaborate.  Thus  the  aggregation  of  human  beings 
into  large  to^vns  has  rendered  it  economically  important  that 


CHAP.  II 


SYSTEM  OF  NATURAL  LIBERTY 


409 


the  provision  of  water  for  the  aggregate  should  be  under  one 
management ; and  the  substitution  of  gas  for  candles  and 
oil-lamps  has  had  a similar  economic  effect  on  the  provision 
of  light. 

The  practical  importance  of  the  conflict  of  private  and  social 
interests  just  mentioned  is  much  increased  by  the  extent  to 
which  total  or  partial  monopoly  may  be  affected  by  combina- 
tion’— especially  when  we  consider  that  it  may  be,  the  interest 
of  the  combining  producers  not  only  to  limit  the  amount  of 
the  utilities  that  they  produce,  in  order  to  raise  their  price, 
but  also  to  resist  any  economies  in  methods  of  production  which 
may  tend  to  decrease  the  demand  for  those  special  utilities^.  It 
should  be  observed  that  wherever  payment  is  not  by  results,  it 
may  easily  be  the  interest  of  any  individual  labourer  in  any 
particular  job  to  extend  uneconomically  the  amount  of  labour 
required,  or  to  give  as  little  Avork  as  he  can  in  the  time 
(supposing  that  harder  work  would  be  more  irksome).  But  it 
is  only  Avhere  some  combination  of  labourers  exists,  or  custom 
partially  sustained  by  combination,  that  it  can  be  any  one’s 
interest  on  the  whole  to  do  this ; since  if  the  price  of  his  services 
were  settled  by  open  competition,  a labourer  so  acting  would 
lower  the  market  value  of  his  services.  And  it  is  to  be  observed 
that  the  same  progress  of  civilisation  which  tends  to  make 
competition  more  real  and  effective,  Avhen  the  circumstances 
of  industry  favour  competition,  also  increases  the  facilities  and 
tendencies  to  combination. 

§ 5.  So  far  we  have  considered  combination  as  a possible 
source  of  economic  loss  to  the  community.  But  in  some  cases 
combined  action  or  abstinence  on  the  part  of  a whole  class  of 
producers  is  required  to  realise  a certain  utility,  either  at  all  or 
in  the  most  economical  way — as  (exf.)  where  land  below  the 
sea-level  has  to  be  protected  against  floods,  or  useful  animals 
and  plants  against  infectious  diseases.  In  a perfectly  ideal 

1 Combination  is  no  doubt  often  tacitly  excluded  in  the  reasoning  by  which 
it  is  argued  that  the  most  economic  production  tends  to  result  from  the  play  of 
individual  self-interests.  But  I do  not  see  how  it  is  legitimately  to  be  excluded. 

^ It  is  one  of  the  most  serious  of  economic  objections  alleged  against  Trades- 
Unions,  from  the  point  of  view  of  the  community,  that  the  regulations  of  some 
of  them  are  partly  framed  to  carry  out  this  anti-social  method  of  increasing  the 
remuneration  of  a particular  class.  Cf.  Thornton  on  Labour,  Part  iii.  c.  5. 
See,  however,  Howell,  Capital  and  Labour,  c.  viii. 


410 


POLITICAL  ECONOMY 


BOOK  III 


cominimity  of  economic  men  all  the  persons  concerned  would 
doubtless  voluntarily  agree  to  take  the  measures  required  to 
ward  off  such  common  dangers ; but  in  any  community  of 
human  beings  that  we  can  hope  to  see,  the  most  that  we 
can  reasonably  expect  is  that  the  great  majority  of  any  in- 
dustrial class  will  be  adequately  enlightened,  vigilant,  and 
careful  in  protecting  their  own  interests ; and  where  the  efforts 
and  sacrifices  of  a great  majority  are  liable  to  be  rendered 
almost  useless  by  the  neglect  of  one  or  two  individuals,  it  will 
always  be  dangerous  to  trust  to  voluntary  association.  And 
the  ground  for  compulsion  becomes  still  stronger  when  the  verv 
fact  of  a combination  among  the  great  majority  of  any  in- 
dustrial class  to  attain  a certain  result  materially  increases  the 
inducement  for  individuals  to  stand  aloof  from  the  combination. 
Take,  for  instance,  the  case  of  certain  fisheries,  where  it  is 
clearly  for  the  general  interest  that  the  fish  should  not  be 
caught  at  certain  times,  or  in  certain  places,  or  with  certain 
instruments,  because  the  increase  of  actual  supjily  obtained  by 
such  captures  is  much  overbalanced  by  the  detriment  it  cau.ses 
to  })ros2iective  supply.  Here — however  clear  the  common 
interest  might  be — it  would  be  jjalpably  rash  to  trust  to 
voluntary  association  for  the  observance  of  the  required  rules 
of  abstinence ; since  the  larger  the  number  that  thus  voluntarily 
abstain,  the  stronger  becomes  the  inducement  offered  to  those 
who  remain  outside  the  association  to  pui-sue  their  fishing  in 
the  objectionable  times,  places,  and  ways,  so  long  as  they  are 
not  prevented  by  legal  coercion. 

§ 6.  I have  spoken  above  of  the  manner  in  which  indivi- 
duals may,  through  combination,  avowed  or  tacit,  make  their 
labour  less  useful  in  order  that  more  of  it  may  be  required.  We 
have  now  to  observe  that,  where  there  is  no  such  combination, 
open  competition  may  cause  a similar  uneconomical  effect,  even 
while  fulfrlling  its  normal  function  of  equalising  the  remunera- 
tion of  producers.  For  suppose  that  the  services  of  any  par- 
ticular class  of  labourers  receive  on  the  average  a dispropor- 
tionately high  remuneration  as  compared  with  those  of  other 
classes ; there  are  two  ways  in  which  this  excess  can  be  reduced, 
either  (1)  by  lowering  the  price  of  a given  quantum  of  the 
utilities,  produced  by  the  workers  in  question,  or  (2)  by  in- 
creasing the  number  of  pereons  competing  to  produce  such 


CHAP,  n 


SYSTEM  OF  NATURAL  LIBERTY 


411 


utilities,  without  augmenting  their  aggregate  produce,  owing 
to  the  increased  difficulty  that  each  has  in  finding  customers. 
So  far  as  this  latter  result  takes  place,  the  effect  of  competition 
on  production  is  positively  disadvantageous.  In  actual  ex- 
perience this  effect  seems  to  occur  most  conspicuously  in  the 
case  of  services  of  which  the  purchasers  are  somewhat  deficient 
in  commercial  keenness  and  activity;  so  that  each  producer 
thinks  himself  likely  to  gain  more  on  the  whole  by  keeping  up 
the  price  of  his  services,  rather  than  by  lowering  it  to  attract 
custom.  An  example  of  this  kind  is  furnished  by  retail  trade, 
especially  the  retail  trade  of  the  smaller  shops  to  which  the 
poorer  class  chiefly  resorts ; since  the  remarkable  success  of 
the  co-operative  stores  of  artisans  implies  a considerable  waste 
of  shopkeepers’  time  and  labour  under  the  system  previmK’'-^ 
universal.  Still  even  in  a community  of  thoroughly  inte 
and  alert  persons,  the  practical  advantages  of  establishec 
Avill  or  business  connexion  would  still  remain : the  econom.c 
man  would  find  it  his  interest  in  ordinary  circumstances,  for  the 
saving  of  time  and  trouble,  to  form  and  maintain  fixed  habits  of 
dealing  with  certain  persons.  There  would  always  be  many 
dealers  who  would  be  trying  to  form,  and  had  as  yet  im- 
perfectly succeeded  in  forming,  such  connexions.  Thus  it 
appears  that  a considerable  percentage  of  unemployed  or  half- 
employed  labour  is  ■ a necessary  concomitant  of  that  active 
competition  for  business  by  which  industry  is  self-organised 
under  the  system  of  natural  liberty : and  the  greater  the 
fluctuations  of  demand  and  supply,  the  greater  is  likely  to 
be  this  percentage  of  waste. 

A somewhat  similar  waste  of  labour  and  capital  employed 
in  manufactures,  &c.,  due  to  the  difficulty  of  adapting  supply 
to  an  imperfectly  known  and  varying  demand,  has  been  noticed 
in  the  last  chapter  but  one  of  the  preceding  Book,  in  discussing 
the  phenomenon  of  (so-called)  “ over-production.” 

But  again ; the  importance  to  each  individual  of  finding 
purchasers  for  his  commodity  also  leads  to  a further  waste, 
socially  speaking,  in  the  expenditure  incurred  for  the  sole 
purjDose  of  attaining  this  result.  A large  part  o£  the  cost  of 
advertisements,  of  agents  and  “ travellers,”  of  attractive  shop- 
fronts, &c.,  comes  under  this  head.  A similar  waste,  similarly 
incident  to  the  individualistic  organisation  of  industry,  is 


412 


POLITICAL  ECONOMY 


BOOK  III 


involved  in  the  initial  expenses  of  forming  joint-stock  companies, 
in  the  case  of  undertakings  too  large  for  ordinary  private 
capitalists — expenses  which  could  not  be  avoided,  even  in  a 
community  of  economic  men,  though  the  skilled  labour  required 
for  launching  such  companies  would  not  be  remunerated  quite 
so  largely  as  it  is  here  and  now. 

In  other  cases  again,  the  mere  process  of  appropriating  and 
selling  a commodity  invcives  such  a waste  of  time,  trouble,  and 
expense  as  to  render  it  on  the  whole  a more  economical  an-ange- 
ment  for  the  community  to  provide  the  commodity  out  of  public 
funds.  Thus  (e.g.)  it  is  an  advance  in  industrial  civilisation  to 
get  rid  of  tolls  on  roads  and  bridges. 

I 7.  Hitherto  Ave  have  not  made  any  distinction  betAveen 
the  interests  of  living  men  and  those  of  remote  generations. 
But  if  Ave  are  examining  the  meiits  and  demerits  of  the  purely 
individualistic  or  competitive  organisation  of  society  from  the 
point  of  vieAv  of  universal  humanity,  it  should  be  observed  that 
it  does  not  necessarily  provide  to  an  adequate  extent  for 
utilities  distant  in  time.  It  Avas  sheAvn  before  that  an  outlay 
of  capital  that  Avould  be  useful  to  the  community  may  not  be 
made  because  it  Avould  be  unremunerative  to  individuals  at  the 
only  rate  at  Avhich  they  could  (oAving  to  poverty,  &c.)  borrow 
the  money.  But  Ave  may  go  further  and  urge  that  an  outlay 
Avhich  Avould  be  on  the  Avhole  advantageous,  if  the  interests  of 
future  generations  are  considered^  as  much  as  those  of  the 
present,  may  not  be  profitable  for  any  individual  at  the  cuiTent 
I'ate  at  which  wealth  can  be  commercially  borrowed. 

This  may  be  merely  because  the  return  is  too  distant ; 
since  an  average  man’s  interest  in  his  heirs  is  not  sufficient 
to  make  him  buy  a very  long  deferred  annuity,  even  if  its  price 
be  calculated  strictly  according  to  the  market  rate  of  interest. 
But,  speaking  more  generally,  I do  not  see  how  it  can  be 
argued  from  the  point  of  view  of  the  community  that  the 
current  interest,  the  current  price  that  individuals  have  to 
be  paid  for  postponing  consumption,  is  the  exact  condition 
that  has  to  be  fulfilled  to  make  such  postponement  desir- 


1 There  is  no  abstract  reason  why  the  interest ‘of  future  generations  should 
be  less  considered  than  that  of  the  now  existing  human  beings;  allowance  being 
made  for  the  greater  uncertainty  that  the  benefits  intended  for  the  former  will 
actually  reach  them  and  actually  be  benefits. 


CHAP.  II 


SYSTEM  OF  NATURAL  LIBERTY 


413 


able;  though  of  course  it  is  a condition  inevitably  exacted 
in  a society  of  economic  men  organised  on  a purely  indi- 
vidualistic basis. 

§ 8.  So  far  I have  left  unquestioned  the  assumpUmT  - 
fundamental  in  the  system  of  natural  liberty — that  individ  . . - 
are  the  best  judges  of  the  commodities  that  they  require  ^ ■ 
of  the  sources  from  which  they  should  be  obtained,  pro. 
that  no  wilful  deception^  is  practised;  as  I have  thought  it 
important  to  make  quite  clear  that,  even  if  this  assumption  he 
granted,  what  I have  called  the  “ scientific  ideal  ” of  economists 
— the  political  conditions  of  industry  which  the}^  assume  in 
abstract  reasoning  with  a view  to  the  explanation  of  economic 
phenomena — cannot  legitimately  be  taken  as  the  practical  ideal 
of  the  Art  of  Political  Economy ; since  it  is  shewn  by  the  same 
kind  of  abstract  reasoning  to  be  liable  to  fail  in  various  ways 
to  realise  the  most  economical  and  effective  organisation  of 
industry.  It  may  perhaps  seem  that  these  results  are  of 
merely  speculative  interest ; since  all  but  a few  fanatics 
admit  that  the  beings  for  whom  complete  laisser  faire  is 
adapted  are  at  any  rate  not  the  members  of  any  existing 
community.  But  I venture  to  think  that  the  theoretical 
conclusion  above  reached  has  considerable,  though  indirect, 
practical  importance.  If  it  were  demonstrably  only  from  blind 
adhesion  to  custom  and  habit,  or  from  want  of  adequate 
enlightenment,  that  the  concurrence  of  self-interests  could 
not  actually  be  relied  upon  to  produce  the  best  aggregate 
result  for  the  community,  at  any  rate  the  direction  of  social 
progress  would  seem  to  be  fixed  and  the  goal  clearly  in  view ; 
the  pace  at  which  we  ought  to  try  to  advance  towards  complete 
laisser  faire  would  still  be  open  to  dispute,  but  the  sense  that 
every  diminution  of  governmental  interference  was  a step  in 
the  right  direction  would  be  a strong  inducement  to  take  the 
step,  if  the  immediate  effects  of  taking  it  appeared  to  be  mixed, 
and  the  balance  of  good  and  evil  doubtful ; while  optimistic 
persons  would  be  continually  urging  society  to  suffer  a little 
present  loss  for  the  sake  of  the  progress  gained  towards  the 

* The  prevention  of  such  deception  is  included  in  the  functions  attributed 
to  government  by  the  extremest  advocates  of  laisser  faire ; though,  as  we 
shall  see  in  the  next  chapter,  it  is  a disputed  question  how  far  government 
should  be  allowed  to  interfere  even  for  this  preventive  purpose. 


414 


POLITICAL  ECONOMY 


BOOK  III 


individualistic  ideal.  But  if,  as  I have  tided  to  shew,  this  is 
not  the  case ; if  on  the  contrary  in  a community  where  the 
members  generally  were  as  enlightened  and  alert  in  the 
pursuit  of  their  interests  as  we  can  ever  expect  human  beings 
to  become,  it  might  still  be  in  various  cases  and  on  vaidous 
grounds  desirable  to  supplement  or  correct  the  defects  of 
private  enterprise  by  the  action  of  the  community  in  its 
collective  capacity, — we  shall  view  in  a somewhat  dift’erent 
light  the  practical  questions  of  the  present  time  as  to  the 
nature  and  limits  of  governmental  interference.  That  is,  in  any 
case  where  the  present  inadequacy  of  luisser  faire  is  admitted 
or  strongly  maintained,  we  shall  examine  carefully  whether 
its  defects  are  due  to  want  of  general  enlightenment,  oi-  rather 
to  one  or  other  of  the  causes  discussed  in  this  chapter ; and  in 
the  latter  case  shall  regard  governmental  interference  as  not 
merely  a tempurary  resource,  but  not  imjjrobahly  a normal 
element  of  the  (Uganisation  of  industry. 

It  does  not  of  course  follow  that  wherever  laisser  faire  falls 
short  governmental  interference  is  expedient ; since  the  inevit- 
able drawbacks  and  disadvantages  of  the  latter  may,  in  any 
jiarticular  case,  be  worse  than  the  shortcomings  of  private 
enterprise.  These  drawbacks  depend  in  part  on  such  political 
considerations  as  lie  beyond  the  scope  of  the  present  discussion, 
and  vary  very  much  with  the  constitution  of  the  government 
in  question,  and  the  state  of  political  morality  in  the  country 
governed.  Of  this  kind  are  (1)  the  danger  of  increasing  the 
power  and  influence  capable  of  being  used  by  government  for 
corrupt  purposes,  if  we  add  to  the  valuable  appointments  at  its 
disposal ; (2)  the  danger,  on  the  other  hand,  that  the  exercise 
of  its  economic  functions  will  be  hampered  and  perverted  by 
the  desire  to  gratify  influential  sections  of  the  community — 
certain  manufacturers,  certain  landlords,  certain  classes  of 
manual  labourers,  or  the  inhabitants  of  certain  localities ; 
(8)  the  danger,  again,  of  wasteful  e.xpenditure  under  the  in- 
fluence of  popular  sentiment — since  the  mass  of  a people, 
however  impatient  of  taxation,  are  liable  to  be  insufficiently 
conscious  of  the  importance  of  thrift  in  all  the  details  of 
national  expenditure.  Then,  fui'ther,  there  is  the  danger  of 
overburdening  the  governmental  machinery  with  work — which 
can  hai-dly  be  altogether  removed,  though  it  may  be  partly 


CHAP.  II 


SYSTEM  OF  NATURAL  LIBERTY 


415 


obviated,  by  careful  organisation;  since  the  central  and  supreme 
organ  of  government  must  exercise  a certain  supervision  over 
all  subordinate  departments,  and  every  increase  in  the  variety 
and  complexity  of  the  latter  must  make  this  supervision  some- 
what more  laborious  and  difficult. 

Other  disadvantages,  in  part  economic,  in  part  purely 
political,  attach  to  particular  modes  of  governmental  inter- 
ference. Thus  when  the  action  of  government  requires  funds 
raised  by  taxation,  we  have  to  reckon — besides  the  financial  cost 
of  collection  and  any  loss  to  production  caused  by  particular- 
taxes — the  political  danger  of  adding  to  a burden  already 
impatiently  borne;  where,  again,  it  requires  the  prohibition 
of  private  industry,  we  must  regard  as  an  item  on  the  wrong- 
side  of  the  account  not  only  the  immediate  irksomeness 
of  restraint,  but  the  repression  of  energy  and  self-help  that 
tends  to  follow  from  it ; where,  on  the  other  hand,  the  inter- 
ference takes  the  form  of  regulations  imposed  on  pi'ivate 
businesses,  in  addition  to  any  detrimental  effects  on  industrial 
processes  that  may  inevitably  accompany  the  observance  of 
such  regulations  we  may  often  have  to  calculate  on  a certain 
amount  of  economic  and  political  evils  due  to  successful  or 
unsuccessful  attempts  to  evade  them. 

And,  lastly,  in  all  cases,  the  work  of  government  has  to 
be  done  by  persons  who — even  with  the  best  arrangements  for 
effective  supervision  and  promotion  by  merit — can  have  only  a 
part  of  the  stimulus  to  energetic  industry  that  the  independent 
worker  feels,  who  may  reasonably  hope  to  gain  by  any  well- 
directed  extra  exertion,  intellectual  or  muscular,  and  must  fear 
to  lose  by  any  indolence  or  neglect.  The  same,  however,  may 
be  said  of  the  hired  labour  used  by  private  employers,  to  an 
extent  which  the  develojiment  of  industry  has  hitherto  continu- 
ally tended  to  increase ; including  even  the  specially  important 
labour  of  management,  in  the  case  of  businesses  conducted  by 
joint-stock  companies.  And,  on  the  other  hand,  government  can 
ap])ly  certain  kinds  of  stimulus  which  private  employers  have 
either  not  at  their  command  at  all,  or  only  in  a less  degree ; it 
can  reward  conspicuous  merit  by  honours  and  distinctions,  and 
offer  to  faithful  service  a more  complete  security  of  continuous 
employment  and  provision  for  old  age.  Still  the  loss,  in  govern- 
mental service,  of  the  enterprise  and  effort  that  is  stimulated 


416 


POLITICAL  ECONOMY 


BOOK  III 


and  sustained  by  a fuller  sense  of  self-dependence  must  be  set 
down  as  very  serious ; and,  on  the  whole,  there  seems  no  doubt 
that  even  where  the  defects  of  laisser  faire  are  palpable  and 
grave,  they  may  still  be  outweighed  by  the  various  disadvan- 
tap’es  incident  to  governmental  management  of  industry. 

But,  even  so,  it  is  important  to  observe,  first,  that  these  dis- 

wtages  are  largely  such  as  moral  and  political  progi-ess  maj- 
be  expected  to  diminish ; so  that  even  where  we  do  not  regard 
the  intervention  of  government  as  at  present  desirable,  we  mav 
yet  look  fonvard  to  it,  and  perhaps  prepare  the  way  for  it.  And, 
secondly,  even  where  we  reject  governmental  interference,  we 
may  yet  recognise  the  expediency  of  supplementing  or  limiting 
in  some  way  or  other  the  results  of  private  enterprise : we  may 
point  out  a place  for  philanthropic  effort — as  in  the  case  of 
educational  foundations;  or  for  associations  of  consumei’s  to 
supply  their  needs  otherwise  than  by  the  competition  of  inde- 
pendent producers — as  in  the  case  of  the  highly  successful 
co-operative  stores  managed  by  artisans. 

§ 9.  What  has  been  said  above  would  be  true,  however  full}' 
it  is  granted  that  social  progress  is  carrying  us  towards  a con- 
dition in  which  the  assumption,  that  the  consumer  is  a better 
judge  than  government  of  the  commodities  that  he  requires  and 
of  the  source  from  which  they  may  be  best  obtained,  i\dll  be 
sufficiently  true  for  all  practical  purposes.  But  it  seems  to  me 
very  doubtful  whether  this  can  be  gi-anted ; since  in  some  im- 
portant respects  the  tendencies  of  social  development  seem  to  be 
rather  in  an  opposite  direction.  As  the  appliances  of  life  become 
more  elaborate  and  complicated  through  the  progress  of  inven- 
tion, it  is  only  according  to  the  general  law  of  division  of  labour 
to  suppose  that  an  average  man’s  ability  to  judge  of  the  adapta- 
tion of  means  to  ends,  even  as  regards  the  satisfaction  of  his 
everyday  needs,  is  likely  to  become  continually  less.  Xo  doubt 
an  ideally  intelligent  person  would  under  these  circumstances 
be  always  duly  aware  of  his  own  ignorance,  and  would  take  the 
advice  of  experts.  But  it  seems  not  unlikely  that  the  need  of 
such  advice,  and  the  difficulty  of  finding  the  right  ad%dsers,  ma}' 
increase  more  markedly  than  the  average  consciousness  of  such 
need  and  difficult}",  at  any  rate  where  the  benefits  to  be  obtained 
or  the  e^^ls  to  be  warded  off  are  somewhat  remote  and  un- 
certain ; esjDecially  when  we  consider  that  the  self-interest  of 


OHAP.  II 


SYSTEM  OF  NATURAL  LIBERTY 


417 


producers  will  in  many  cases  lead  them  to  offer  commodities 
that  seem  rather  than  are  useful,  if  the  difference  between 
seeming  and  reality  is  likely  to  escape  notice. 

How  far  government  can  usefully  attempt  to  remedy  these 
shortcomings  of  self-help  is  a question  that  does  not  admit  of  a 
confident  general  answer,  for  the  reasons  discussed  in  the 
preceding  section.  We  may,  however,  notice  certain  kinds  of 
utility — which  are  or  may  be  economically  very  important  to 
individuals — which  government,  in  a well-organised  modem 
community,  is  peculiarly  adapted  to  provide.  Complete 
security  for  savings  is  one  of  these.  I do  not  of  course  claim 
that  it  is  an.  attribute  of  governments,  always  and  everywhere, 
that  they  are  less  likely  to  go  bankrupt,  or  defraud  their 
creditors,  than  private  individuals  or  companies:  but  merely 
that  this  is  likely  to  be  an  attribute  of  governments  in  the 
ideal  society  that  orthodox  political  economy  contemplates ; of 
which  we  may  find  evidence  in  the  fact  that  even  now,  though 
loaded  with  war  debts  and  in  danger  of  increasing  the  load,  the 
English  government  can  borrow  more  cheaply  than  the  most 
prosperous  private  company.  So  again — without  at  present 
entering  dangerously  into  the  burning  question  of  currency — we 
may  at  least  say  that  if  stability  in  the  value  of  the  medium  of 
exchange  can  be  attained  at  all,  without  sacrifices  and  risks 
outweighing  its  advantages,  it  must  be  by  the  intervention  of 
government : a voluntary  combination  powerful  enough  to  pro- 
duce the  result  is  practically  out  of  the  question. 

And  I have  already  observed  that  where  uniformity  of  action 
or  abstinence  on  the  part  of  a whole  class  of  producers  is  re- 
quired for  the  most  economical  production  of  a certain  utility, 
the  intervention  of  government  is  at  least  likely  to  be  the  most 
effective  way  of  attaining  the  result : especially  if  the  adoption 
of  the  required  rule  by  a majority  renders  it  decidedly  the 
immediate  interest' of  individuals  to  break  through  it. 

To  sum  up : the  general  presumption  derived  from  abs^^ 
economic  reasoning  is  not  in  favour  of  leaving  industry  aitogeth  ' 
to  private  enterprise,  in  any  community  that  can  usefully  f- 
taken  even  as  an  ideal  for  the  guidance  of  practical  statesman- 
ship; but  is  on  the  contrary  in  favour  of  supplementing  and 
controlling  such  enterprise  in  various  ways  by  the  collective 
action  of  the  community.  The  general  principles  on  which  the 

s.  p.  E.  27 


418 


POLITICAL  ECONOMY 


BOOK  III 


nature  and  extent  of  such  collective  action  should  be  determined 
have  been  given  in  the  present  chapter ; but  it  would  hardly  be 
possible  to  work  out  a system  of  detailed  practical  rules  on  the 
basis  of  these  principles,  by  the  abstract  deductive  method  here 
adopted ; owing  to  the  extent  to  which  the  construction  of  such 
a system  ought  reasonably  to  be  influenced  by  the  particular  social 
and  pohtical  conditions  of  the  country  and  time  for  which  it  is 
framed.  In  passing,  therefore,  from  abstract  principles  to  their 
concrete  applications — so  far  as  the  limits  of  my  treatise  allow 
me  to  discuss  the  latter — it  seems  best  to  adopt  a more  empirical 
treatment ; the  exposition  of  which  will  be  more  conveniently 
reserved  for  another  chapter. 


CHAPTER  III. 

THE  RELATIONS  OF  GOVERNMENT  TO  INDUSTRY. 

§ 1.  In  the  chapter  that  follows  this  one  I propose  to  discuss 
some  of  the  chief  cases  of  governmental  intervention  to  benefit 
production  which  fonn  a part  of  the  accepted  policy  and  practice 
of  civilised  communities  at  the  present  day : in  order  to  examine 
the  general  principles  on  which  they  are  or  may  be  maintained, 
and  to  point  out  how  they  illustrate  the  general  exceptions  to 
the  suflBciency  of  Natural  Liberty  which  we  have  just  been 
considering  from  an  abstract  point  of  view. 

But  before  proceeding  to  this  examination,  it  seems  desirable 
to  distinguish  as  clearly  as  we  can  between  the  strictly  economic 
intervention  of  government  and  those  cases  of  governmental 
interference  with  industry  in  which  the  better  production — or 
even  better  distribution — of  purchasable  commodities  is  not 
the  primary  aim;  and  in  which,  therefore,  economic  consider- 
ations caimot  be  put  forward  as  decisive,  though  they  must 
always  be  allowed  some  weight.  The  investigation  of  this  latter 
class  of  interventions  belongs  rather  to  the  wider  Art  of  Politics 
than  to  the  special  Art  of  Political  Economy.  It  is,  of  course, 
fundamentally  important,  for  the  economic  prosperity  of  the 
community  governed,  that  government  should  perform  efficiently 
its  main  and  universally  admitted  function  of  protecting  private 
persons  and  their  property  from  injury  and  securing  the  fulfil- 
ment of  contracts ; but  the  particulars  and  limits  of  this  indis- 
pensable work  have  to  be  considered  in  relation  not  simply  to 
wealth  but  to  social  well-being  generally.  At  the  same  time, 
since— as  we  shall  see — it  is  difficult  to  draw  the  line  between 
these  two  classes  of  governmental  intervention,  and  since  even 

27—2 


420 


POLITICAL  ECONOMY 


BOOK  III 


where  the  primary  aim  of  the  intervention  carries  us  beyond 
the  range  of  political  economy,  economic  considerations  are 
often  important,  I propose  in  the  present  chapter  to  examine 
briefly  the  chief  economic  questions  that  arise  in  considering 
the  necessary  action  of  government  in  relation  to  private  in- 
dustry. 

I will  begin  by  giving  a completer  statement  of  what  may 
be  called  the  “individualistic  minimum”  of  governmental  inter- 
ference ; which — as  I briefly  noticed  in  the  preceding  chapter 
— is  generally  taken  for  granted  even  by  thoroughgoing 
advocates  of  the  system  of  Natural  Liberty.  We  find  that, 
even  in  the  view  of  individualists.  Government  has  the  fol- 
lowing fundamental  duties: — 

1.  To  protect  the  interests  of  the  community  generally, 
and  individual  citizens,  so  far  as  may  be  necessary,  fi'om  the 
attacks  of  foreign  states. 

2.  To  guard  individual  citizens  fi'om  physical  injury, 
constraint,  insult,  or  damage  to  reputation,  caused  by  the 
intentional  or  culpably  careless  action  of  other  individuals. 

3.  To  guard  their  property  from  detriment  similarly  caused; 
which  involves  the  function  of  determining  doubtful  points  as 
to  the  extent  and  content  of  the  Right  of  Property  and  the 
modes  of  legally  acquiring  it. 

4.  To  prevent  deception  leading  to  detriment  of  person  or 
property. 

5.  To  enforce  contracts  made  by  adults  in  full  possession 
of  their  reasoning  faculties,  and  not  obtained  by  coercion  or 
misrepresentation,  nor  injurious  to  other  persons. 

6.  To  protect  in  a special  degree  persons  unfit,  through  age 
or  nlental  disorder,  to  take  care  of  their  o^vn  interests.  Of  this 
kind  of  protection  the  most  important  case  is  that  of  children ; 
and  here  it  should  be  observed  that  the  protection  may  be 
exercised  either  directly,  or  indirectly  through  regulation  of  the 
relations  of  the  sexes,  so  far  as  this  may  be  required  in  order  to 
make  generally  adequate  provision  for  the  care  and  nurture  of 
children. 

To  these  may  be  added  the  duty  of  providing  for  its  o^vn 
support  and  its  own  defence  against  internal  as  well  as  external 
foes.  The  inquiry  into  the  best  mode  of  making  this  provision, 
by  taxation  or  otherwise,  has  always  been  regarded  as  an 


CHAP.  Ill  RELATIONS  OF  GOVERNMENT  TO  INDUSTRY  421 


important  branch  of  the  economist’s  study ; indeed  it  constitutes 
a chief  part  of  the  art  of  political  economy  in  the  view  of  most 
economists  since  Adam  Smith ; and  I accordingly  propose  to 
deal  with  it  in  a separate  chapter^ 

§ 2.  In  considering  the  economic  aspect  of  the  action  of 
government,  under  the  other  heads  above  mentioned,  it  is 
important  to  note  that  its  interference  may  be  exerted  in 
various  modes  and  in  various  degrees  of  intensity.  Besides 
(1)  interference  by  direct  prohibition  or  command,  which 
may,  of  course,  vary  indefinitely  in  gravity,  the  government 
may  (2)  indirectly  prevent  or  discourage  certain  kinds  of  con- 
tract by  refusing  to  enforce  them ; or  (3)  it  may  give  to  the 
obligations  involved  in  certain  common  kinds  of  agreements 
such  as  sale  and  purchase,  letting  and  hiring,  &c.,  a precise 
definition,  interpretation,  or  presumption,  which  will  be  held  to 
be  valid  in  all  cases  where  there  is  no  special  contract  to  the 
contrary ; or  again  (4)  certain  kinds  of  business  may  be  under- 
taken by  the  State,  though  at  the  same  time  it  may  remain 
open  to  private  individuals  or  joint-stock  companies  to  enter 
into  competition  with  the  governmental  agency  if  they  choose. 
In  this  latter  case  the  only  element  of  compulsion  consists  in 
the  coercive  levying  (by  taxation)  of  funds  required  for  carrying 
on  the  business  in  question:  and  where  the  business  can  be 
made  to  pay  its  own  expenses,  even  this  element  of  coercion 
vanishes.  Which  (if  any)  of  these  different  modes  of  inter- 
ference should  be  adopted  in  any  particular  case  is  a question 
which  cannot  be  entirely  decided  by  economic  considerations ; 
since  even  where  the  more  intense  interference  by  direct  pro- 
hibition or  command  is  both  cheaper  and  more  effective,  a 
statesman  may  reasonably  decline  to  employ  it  from  fear  of 
the  displeasure  and  discontent  which  it  is  likely  to  cause ; 
while,  again,  the  probable  amount  of  displeasure  and  discontent 
varies  greatly  with  the  actual  state  of  custom  and  opinion  in 
any  particular  community.  But  it  should  be  observed  that  the 
intensity  of  different  kinds  of  interference  will  be  very  differently 
estimated,  according  as  we  take  a political  or  an  economic 
point  of  view.  Thus,  politically  speaking,  interference  is  at 

' See  chapter  viii.  It  should  be  observed,  however,  that  fiscal  considerations 
necessarily  enter  into  the  discussion  of  certain  kinds  of  governmental  inter- 
ference, designed  mainly  for  other  purposes. 


422 


POLITICAL  ECONOMY 


BOOK  III 


its  minimum,  when  government,  without  any  legal  prohibition 
or  restriction  of  private  industry,  merely  prevents  its  develop- 
ment in  a certain  direction,  by  taking  some  new  kind  of 
business — such  as  the  construction  and  management  of  rail- 
ways— ^entirely  into  its  own  hands.  But,  economically  con- 
sidered, this  interference  is  greater  than  when  government 
places  private  businesses  under  legal  control  and  regulation ; 
since  in  the  latter  case  some  of  the  effects — good  or  bad — of 
private  enterprise  are  retained,  whereas  by  the  former  method 
they  are  altogether  excluded. 

§ 3.  Let  us  now  consider  separately  each  of  the  indis- 
pensable functions  above  enumerated.  Under  the  first  head,  of 
defence  against  foreign  enemies,  the  most  important  economic 
questions'  relate  chiefly  to  the  best  way  of  securing  an  adequate 
supply  of  the  personal  services,  materials,  or  instruments  required 
for  war ; and  these  will  be  more  fitly  discussed  later,  when  we 
come  to  treat  of  the  theory  of  the  provision  for  national  wants. 
Here  I would  only  point  out  that  the  needs  of  war  may  furnish 
decisive  considerations  in  favour  of  measures  which  would  other- 
wise be  inexpedient — although  they  are  not  unlikely  to  be 
advocated  on  other  than  military  grounds.  Thus  a govern- 
ment may  reasonably  undertake  for  military  reasons  the  con- 
struction of  railways  commercially  unremunerative ; or  may 
control  the  arrangement  of  a system  of  railways  which  it 
would  otherwise  leave  to  unrestricted  private  enterprise.  Again, 
similar  reasons  have  often  been  urged  for  the  protection  of 
native  industry  in  certain  departments;  and  certainly,  where 
there  is  a reasonable  probabihty  that  a government  would  find 
serious  difficulty  in  obtaining,  should  it  be  involved  in  war,  any 
part  of  the  supply  of  men  or  things  required  for  the  efficient 
conduct  of  the  war,  it  is  obvious  that  some  kind  of  provision 
should  be  made  in  time  of  peace  for  meeting  this  difficulty ; 
and  we  cannot  say  a priori  how  far  it  will  in  any  particular 
case  be  better  to  meet  it  directly,  by  a more  extensive  and 
costly  organisation  of  the  army  or  nay)",  or  indirectly  by  the 
encouragement  of  certain  branches  of  private  industr}'.  Thus, 
for  instance,  it  may  be  questioned  whether  Adam  Smith  was 
right  in  commending  the  English  Navigation  Laws  of  his 

' 1 pass  over  the  abnormal  and  violent  disturbances  of  production  and 
exchange  which  actual  war  may  render  needful  or  expedient. 


CHAP.  Ill  RELATIONS  OF  GOVERNMENT  TO  INDUSTRY  423 


time  which  “endeavoured  to  give  the  sailors  and  shipping 
“of  Great  Britain  the  monopoly  of  the  trade  of  their  own 
“ country  ” ; but  the  question  cannot  be  answered  without  a 
careful  investigation  of  details.  The  restrictions  thus  imposed 
on  trade  must  of  course  have  increased  the  cost  of  foreign 
commodities  to  the  English  consumers ; but  they  may  neverthe- 
less have  been  the  least  burdensome  mode  of  securing  a due 
supply  of  sailors  and  shipping  for  our  maritime  wars.  On 
similar  grounds  we  cannot  say  positively  that  it  can  never 
be  expedient  for  a country  situated  as  England  is  to  secure 
itself  by  protection  to  native  agriculture  against  the  danger  of 
having  its  necessary  supply  of  food  cut  off  by  a maritime 
blockade. 

§ 4.  It  is,  however,  of  more  general  importance  to  consider 
the  various  kinds  of  interference  with  industry  that  may 
be  necessary  or  expedient  for  the  due  protection  of  the  life, 
health,  physical  comfort,  freedom,  and  reputation  of  individuals 
from  harm  inflicted,  intentionally  or  otherwise,  by  private 
persons.  In  considering  the  proper  limits  of  this  interference, 
we  find  much  controversy  on  the  question  how  far  government 
may  legitimately  go  in  preventing  acts  that  are  not  directly  or 
necessarily  harmful,  on  the  ground  that  they  are  likely  in  some 
indirect  way  to  have  harmful  consequences  to  persons  other 
than  the  agent.  It  would  be  out  of  place  here  to  enter  fully 
into  this  controversy ; but  I may  perhaps  say  that  the  question 
appears  to  me  to  be  one  of  degree : and  that  I do  not  see  how 
the  answer  to  it  in  concrete  cases  can  reasonably  be  decided  by 
any  broad  general  formula  ^ In  some  cases  the  burden  is  so 
trifling  that  no  one  would  hesitate  to  impose  it,  should  experience 
shew  it  to  be  at  all  efficacious  for  the  attainment  of  any  of 
the  ends  above  distinguished.  Of  this  kind  are  the  regulations 
that  printers’  and  publishers’  names  should  be  affixed  to  pub- 
lished documents,  in  order  to  secure  punishment  or  redress  in 
case  of  libels ; that  poisons  when  sold  should  be  manifestly 
designated  as  such ; that  vehicles  should  carry  a light  at  night, 

* For  instance,  I do  not  see  on  what  grounds  it  can  be  maintained  that  “it 
“ is  not  a merely  constructive  or  presumptive  injury  to  others  which  will  justify 
“the  interference  of  the  law  with  individual  freedom”  (Mill,  On  Liberty,  c.  4). 
It  appears  to  me  that,  on  utilitarian  principles,  all  we  can  say  is  that  the 
presumption  must  be  strong  enough  to  outweigh  the  direct  and  indirect  mischief 
of  coercion. 


424 


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BOOK  in 


&c.  So  far  as  more  serious  interference  with  the  production  or 
sale  of  certain  commodities  is  exerted,  in  order  to  protect  from 
disease  and  other  physical  damage  either  the  producers  or 
purchasers  of  such  commodities,  or  other  members  of  the  com- 
munity, such  interference  is,  no  doubt,  liable  to  be  attended 
by  economic  drawbacks,  which  have  to  be  carefully  weighed 
against  the  evils  which  experience  shews  it  to  be  capable  of 
preventing.  But  the  final  decision  as  to  its  expediency  does 
not  fall  within  the  sphere  of  political  economy  and  cannot  be 
arrived  at  by  strictly  economic  methods ; since  life  and  health 
are  goods  which  it  is  not  possible  to  estimate  at  a definite^ 
pecuniary  value. 

The  question  as  to  the  expediency  of  governmental  inter- 
ference which  we  may  call  “indirectly  individualistic” — i.e., 
designed  for  the  protection  of  individuals  other  than  those 
whose  freedom  of  action  is  thereby  diminished — tends  in 
practice  to  be  mixed  with  a question  which,  from  an  abstract 
point  of  view,  is  fundamentally  distinct ; namely,  how  far  (if  at 
all)  government  ought  to  interfere  “ paternally”  to  prevent  injury 
to  the  life  or  health  of  an-  individual  caused  either  by  himself  or 
with  his  own  consent.  In  the  chief  cases  where  a man  harms 
himself  so  seriously  as  to  suggest  a need  of  governmental 
interference,  his  conduct  has  also  an  important  tendency  to 
harm  others ; hence  it  is  often  diflScult  to  say  whether  it  is  the 
former  or^  the  latter  kind  of  harm  that  a given  piece  of  legisla- 
tion is  designed  to  prevent.  Thus  the  various  prescriptions  and 
prohibitions  included  in  our  own  recent  sanitaiy  legislation  are 
frequently  criticised  as  “paternal”:  but  it  may  fairly  be  said 
that  in  such  cases  coercion  is  apphed  to  individuals  not  primarily 
in  their  own  interest,  but  in  that  of  others  who  might  suffer  if 
their  houses  became  a focus  of  disease.  So,  again,  few  indi- 
vidualists would  deny  that  the  tendency  of  drunkenness  to 
cause  breaches  of  the  peace  is  a legitimate  ground  for  some 
interference  with  the  trade  of  selling  alcohol : and  the  most 
thoroughgoing  abolitionist  urges  his  restriction  more  as  in- 
directly individualistic  than  as  paternal — i.e.,  more  on  the 

* I say  “definite”  because  all  reasonable  persons  would  admit  that  at  a 
certain  point  the  machinery  for  saving  even  life  and  health  may  become  too 
costly;  and,  therefore,  the  practical  necessitj-  of  balancing  these  goods  in  some 
way  against  wealth  cannot  be  evaded. 


CHAP.  Ill  RELATIONS  OF  GOVERNMENT  TO  INDUSTRY  425 


ground  of  the  proved  tendency  of  alcoholic  excess  to  make 
a man  beat  his  wife  and  starve  his  children,  than  on  the  ground 
of  its  tendency  to  injure  the  drunkard  himself. 

So  far  as  any  such  legislation  is  avowedly  “ paternal,”  it  is 
clearly  opposed  to  the  fundamental  assumption — on  which  (as 
we  have  seen)  the  economic  rule  of  laisser  faire  partly  rests — 
that  every  man  is  the  best  judge  of  what  contributes  to  his  own 
happiness ; since  on  this  principle  each  individual  ought  to  set 
his  own  value  on  life  and  health,  and  to  choose  freely  the  means 
of  maintaining  them,  just  as  much  as  in  the  case  of  other 
utilities.  I have,  however,  already  indicated  that  I do  not 
accept  this  principle  as  universally  valid : I only  accept  it 
as  furnishing  (as  Cairnes  says)  a handy  though  rough  rule 
of  practical  statesmanship,  in  accordance  with  ordinary  ex- 
perience of  human  nature,  from  which  we  ought  only  to 
deviate  in  special  cases  when  there  are  strong  empirical  grounds 
for  concluding  that  our  general  assumption  is  not  borne  out 
by  facts.  And  this  view  is  in  harmony  with  the  practice  of  all 
civilised  governments.  Thus  {e.g.)  our  own  government  does 
not  trust  its  subjects  to  find  out  for  themselves  and  avoid 
unhealthy  food  or  improperly  qualified  physicians,  surgeons,  and 
apothecaries : or  to  refrain  from  buying  diseased  meat : or  to 
refuse  to  take  part  in  industrial  processes  which  are  exposed  to 
special  dangers — as  {e.g.)  mining  and  navigation — unless  due 
precautions  are  taken  against  these  dangers.  It  finds  that  even 
the  self-helpful  Englishman  cannot  be  trusted  to  take  adequate 
care  of  himself  in  these  matters : hence  it  endeavours  in  various 
ways  to  obviate  the  mischief  liable  to  result  from  this  want  of 
care.  Rarely,  indeed,  does  it  attempt  by  direct  prohibition  to 
prevent  an  individual  from  doing  what  is  likely  to  injure 
himself  alone ; but  it  prescribes  conditions  under  which  certain 
dangerous  industries  are  to  be  carried  on,  and  does  not  permit 
them  to  be  violated,  even  with  the  full  consent  of  the  persons 
who  would  be  endangered ; it  directly  prohibits  persons  not 
qualified  in  a manner  which  it  prescribes  from  exercising  certain 
trades — -such  as  that  of  apothecary,  and  that  of  pilot ; in  other 
cases  it  indirectly  hinders  the  employment  of  practitioners  not 
properly  qualified  by  refusing  to  enforce  payment  of  fees  for 
their  services. 

To  meet  the  special  arguments  for  these  and  similar  measures 


426 


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BOOK  III 


by  a simple  reference  to  the  general  considerations  in  favour  of 
leaving  sane  adults  to  manage  their  own  affairs  appears  to  me 
clearly  irrational  and  unscientific.  But  to  discuss  the  proper 
limits  of  this  “paternal”  interference — as  I have  said  also  of  the 
“ indirectly  individualistic  ” interference  with  which  it  is  practi- 
cally mixed  up — would  clearly  carry  us  beyond  the  province  of 
the  present  treatise : since  all  would  agree  that,  in  determining 
these  limits,  considerations  of  wealth  cannot  be  taken  as  decisive. 
If  we  regarded  a man  merely  as  a means  of  producing  wealth, 
it  might  clearly  “ pay  ” to  allow  needle-grinders  to  work  them- 
selves to  death  in  a dozen  years — as  they  used  to  be  willing  to 
do  in  order  to  earn  higher  wages.  But  a civilised  community 
cannot  take  this  view  of  its  members ; the  question  whether 
men  are  to  be  allowed  thus  to  shorten  their  lives  for  a 
few  extra  shillings  a week  has  clearly  to  be  decided  on  other 
than  merely  economic  grounds.  At  the  same  time,  it  is  the 
business  of  the  economist  to  estimate  the  expense,  trouble,  and 
loss  of  utility  that  interference  of  this  kind  tends  to  cause ; and 
if  he  finds  it  in  any  case  excessively  costly,  or  likely  to  be 
frustrated  by  a tenacious  and  evasive  pursuit  of  private  interest 
on  the  part  of  the  persons  interfered  with,  he  must  direct 
attention  to  these  drawbacks. 

And  the  same  may  be  said  of  the  interference  of  govern- 
ment for  the  protection  of  children ; whether  directly,  as  by 
limiting  the  amount  of  labour  that  may  be  exacted  from  them, 
and  securing  to  them  a certain  amount  of  education ; or  in- 
directly, by  placing  restrictions  on  the  labour  of  married  women 
(or  women  who  have  borne  children)  so  far  as  these  appear 
necessary  in  order  to  secure  the  proper  performance  of  their 
maternal  functions.  As  the  system  of  natural  liberty  is,  even 
by  its  most  vehement  advocates,  regarded  as  only  applicable  to 
adults,  it  is  not  in  any  way  opposed  to  the  principle  of  such 
regulations ; and  though  (1)  the  immediate  economic  loss  caused 
by  such  restrictions,  and  (2)  the  ultimate  economic  gain  to  the 
community  from  the  improved  health  and  training  of  its  chil- 
dren, are  important  considerations  in  determining  the  nature 
and  extent  of  this  kind  of  interference',  they  are  not  by  them- 
selves decisive.  It  is  often  said  that  parents  are  the  best 
guardians  of  their  children’s  interests : but  this,  at  any  rate, 
is  quite  a different  proposition  from  that  on  which  the  general 


CHAP.  Ill  RELATIONS  OF  GOVERNMENT  TO  INDUSTRY  427 


economic  argument  for  industrial  non-interference  is  based, — 
namely,  that  every  sane  adult  is  the  best  guardian  of  his  own 
interests:  and  the  limitations  within  which  experience  will 
lead  us  to  restrict  the  practical  application  of  the  two  principles 
respectively  are  not  likely  to  coincide. 

§ 5.  In  close  analogy  to  the  regulations  above  noticed  that 
indirectly  protect  the  person,  stands  another  class  of  govern- 
mental interferences  which  have  for  their  object  the  indirect  pre- 
vention of  theft.  Of  this  kind  are  the  regulations  that  hamper 
the  easy  disposition  of  stolen  goods;  such  as  the  English  law 
that  a dealer  in  old  metal  may  not  at  one  time  buy  less  than 
certain  minimum  quantities  of  lead,  copper,  tin,  &c. ; and  some 
of  the  restrictions  imposed  on  pawnbrokers.  With  these,  again, 
we  may  class  regulations  that  aim  at  the  indirect  prevention  of 
fraud  in  exchanges ; such  as  the  prescription  of  standard  weights 
and  measures,  and  the  more  recent  prohibition  of  “ truck  ” (that 
is,  of  the  payment  of  wages  otherwise  than  in  money) — so  far 
as  this  is  designed  to  secure  to  labourers  the  amount  of  real 
wages  that  is  by  contract  fairly  due  to  them.  If  we  could 
extend  the  notion  of  “ fraud  ” to  include  all  cases  in  which  one 
of  the  parties  to  an  agreement  “ imposes  ” upon  the  ignorance 
of  the  other,  several  other  important  interferences  with  industry 
might  be  brought  under  this  head  ; such  as  the  chief  regulations 
enforced  on  joint-stock  companies, — whether  framed  to  protect 
the  interests  of  the  individual  members  of  such  companies 
against  their  directors,  or  to  protect  other  persons  who  may 
deal  with  them, — the  taxing  of  solicitors’  bills,  and  some  of  the 
regulations  of  the  business  of  carrying  emigrants. 

It  is  to  be  observed,  however,  that  the  element  of  active 
misrepresentation  is  not  necessarily  present  in  all  cases  of 
what  is  commonly  called  “imposition.”  In  fact,  the  notion 
of  “imposition”  affords  us  a transition,  by  which  we  gradually 
pass  from  exchanges  in  which  positive  deception  is  practised  to 
exchanges  which  are  merely  held  to  be  inequitable  through 
the  ignorance  on  one  side  of  the  quality  of  the  article  ex- 
changed, even  though  there  may  be  no  active  misrepresentation 
on  the  other  side,  and  no  general  understanding  that  the 
other  party  will  furnish  the  knowledge  that  is  wanting.  Now, 
in  ordinary  buying  and  selling,  a purchaser  is  expected  to 
protect  himself  against  loss  incurred  under  these  latter  con- 


428 


POLITICAL  ECONOMY 


BOOK  III 


ditions ; and  though  experience  may  shew  that  the  inter- 
vention of  government  to  protect  him  is  in  certain  cases 
urgently  r ^uired,  it  must  be  allowed  that  such  intervention 
is  hardly  consistent  with  the  fundamental  assumption  of  the 
system  of  natural  liberty,  that  the  sane  adult  individual  is 
likely  to  be  a better  judge  of  his  own  interests  than  his  govern- 
ment is.  At  any  rate  we  may  say  that  at  this  point  we 
approach  the  rather  delicate  theoretical  Hne  that  separates 
governmental  action  for  the  maintenance  of  real  freedom  of 
contract — which  is  held  to  be  impaired  by  successful  fraud — 
from  action  that  invades  this  freedom.  Various  regulations 
tending  to  prevent  contracts  from  being  made  under  misappre- 
hension as  to  material  circumstances  may  be  regarded  as  l}dng 
on  this  debatable  margin:  such  as  the  rules  of  law  obliging 
vendors  with  special  opportunities  of  knowledge — e.g.,  vendors 
of  land  and  promoters  of  joint-stock  companies — to  disclose  any 
material  circumstances  affecting  the  value  of  what  they  offer 
for  sale : or,  again,  the  compulsory  registration  of  contracts  like 
mortgages  or  bills  of  sale,  which  are  liable  to  render  the  x'eal 
financial  position  of  one  of  the  parties  to  the  contract  so 
materially  different  from  his  apparent  position  that  third  per- 
sons dealing  with  him  are  in  danger  of  being  seriously  misled. 

A somewhat  similar  margin  presents  itself  when  we  try  to 
define  the  other  main  condition  required  for  the  vahdity  of  con- 
tracts accoiding  to  the  principles  of  natural  Hberty ; namely,  that 
they  should  not  have  been  procured  by  coercion — proidded  we 
extend  the  notion  of  coercion  to  include  not  merely  physical 
injury  or  constraint,  but  also  the  moi'al  pressure  which  is  some- 
times called  “ undue  influence.”^  It  is,  of  course,  in  accordance 
with  the  strictest  limitation  of  the  sphere  of  government  that  it 
should  prohibit  and  invalidate  agi-eements  procured  by  the 
infliction  or  threat  of  any  illegal  harm ; and  further,  if  in  any 
case  one  party  to  a contract  is  able  to  cause  pain  or  alarm  of 
a kind  which  the  law  does  not  generally  attempt  to  prevent, 
but  which  is  not  likely  to  be  inflicted  or  threatened  except  as 
an  inducement  to  make  the  contract,  a special  interference  to 
prevent  such  undue  pressure  may  fairly  be  regarded  as  a mere 
defence  of  freedom.  Thus  the  special  protection  given  by 

1 The  term  “undue  influence”  is  also  used  to  denote  some  kinds  of  what  I 
have  previously  called  “imposition.” 


CHAP.  Ill  EELATIONS  OF  GOVERNMENT  TO  INDUSTRY  429 


our  law  to  merchant  seamen,  by  the  invalidation  of  contracts 
alienating  part  of  their  claims  to  wages,  may  be  justified  by 
the  special  opportunities  of  undue  influence  which  the  needful 
discipline  of  a ship  gives  to  its  master.  So,  again,  the  restric- 
tions placed  on  the  labour  of  women  generally  in  the  English 
factory  legislation , are  commonly  and  plausibly  defended  on  the 
ground  that  women,  owing  to  their  normal  domestic  depen- 
dence, require  to  be  protected  against  the  undue  influence 
of  the  men  with  whom  they  live.  When,  however,  the  law 
interferes  to  prevent  a contract  in  which  A merely  “ takes 
“ advantage  of  the  distress  ” of  B,  without  being  in  any  way 
responsible  for  it — or,  otherwise,  when  the  pressure  which  A 
puts  on  B is  merely  the  threat  of  not  rendering  some  service 
which  he  is  in  no  way  bound  to  render  independently  of  the 
contract — it  seems  plain  that  such  interference  must  be  viewed 
not  as  a protection  of  freedom  of  contract,  but  as  a limitation  of 
it  in  the  interests  of  disadvantageously  placed  members  of  the 
community. 

I have  spoken  of  the  enforcement  of  contracts  as  a kind 
of  protection  to  freedom:  and  there  can  be  no  doubt  that 
a refusal  to  enforce  such  contracts  is  an  interference  with  the 
spontaneous  organisation  of  industry  which  the  system  of 
natural  liberty  contemplates;  in  which  enforcement  of  con- 
tract is  the  one  elementary  process  by  the  repetition  and 
complication  of  which  the  whole  fabric  is  bound  together. 
At  the  same  time,  there  is  certainly  something  paradoxical  in 
calling  the  refusal  of  government  to  enforce  certain  contracts 
an  “ interference”  with  the  freedom  of  the  individuals  left  alone : 
and  it  is  probably  for  this  reason  that  the  very  important 
restrictions,  by  which  the  enforcement  of  contract  has  actually 
been  limited,  have  not  commonly  been  treated  as  violations  of 
laisser  fairs.  Thus  in  England  hardly  any  engagement  to 
render  personal  services  gives  the  promisee  a legal  claim  to 
more  than  pecuniary  damages;  to  put  it  otherwise,  almost  all 
such  contracts,  if  unfulfilled,  turn  into  mere  debts  of  money  so 
far  as  their  legal  force  goes.  And  it  should  be  added  that  even 
the  pa3mient  of  debts  is  to  a very  large  extent  not  exacted,  even 
from  persons  who  are  now  perfectly  able  to  pay  them ; provided 
that  at  some  previous  time  such  persons  have  proved  their 
inability  to  pay,  given  up  their  property  for  division  among 


430 


POLITICAL  ECONOMY 


BOOK  III 


their  creditors,  and  thus  obtained  as  bankrupts  protection 
against  any  future  exaction  of  past  debts.  This  very  important 
limitation  of  the  effects  of  contract  is,  I conceive,  mainly  to 
be  justified  as  tending  to  promote  the  interests  of  production ; 
being  designed  to  restore  to  the  bankrupt  the  stimulus  to 
useful  industry  which  an  indefinite  prolongation  of  his  pecuniarj" 
liabilities  would  take  away  fi’om  all  but  the  most  energetic 
minds.  It  is  thought  that  this  can  be  done  vdthout  any 
material  sacrifice  of  the  interests  of  creditors ; since  the  latter, 
even  if  their  claims  were  kept  legally  valid,  would  still  have  no 
effective  means  of  compelling  the  defaulting  debtor  to  earn  the 
money  required  to  satisfy  them.  It  may  be  observed,  however, 
that  the  same  line  of  reasoning  that  thus  justifies  the  general 
principle  of  a bankruptcy  law  also  shews  us  that  this  kind  of 
interference  may  easily  be  carried  too  far  for  the  real  interests 
of  industry.  For — even  assuming  that  the  details  of  such  a law 
can  be  contrived  and  administered  so  as  to  prevent  waste  of  the 
bankrupt’s  estate,  secure  its  equal  division  among  the  creditors, 
and  adequately  punish  not  only  common  dishonesty  on  the 
bankrupt’s  part,  but  also  such  reckless  and  improper  dealing 
with  his  borrowed  resources  as  substantially  amounts  to  dis- 
honesty— the  danger  still  remains  that  the  prospect  of  relief 
through  bankruptcy  may  tempt  men  to  run  risks  with  borrowed 
property  which  they  would  not  think  it  expedient  to  run  with 
their  own ; and  which,  therefore,-  it  is  the  interest  of  the  com- 
munity to  prevent,  although  such  dealing  may  not  admit  of 
being  proved  to  be  criminally  reckless.  And  further,  granting 
that  a bankrupt  should  be  exempt  from  legal  obligation  to  pay 
his  creditors  in  full,  it  still  seems  right  that  society  should 
emphatically  recognise  the  superior  morabty  of  the  bankrupt 
who  does  exert  himself  to  repair  the  losses  he  has  caused.  To 
attain  this  end,  and  at  the  same  time  reduce  the  danger  before 
mentioned,  it  seems  desirable  to  impose  on  the  bankrupt  certain 
disabilities  which  would  not  seriously  interfere  with  his  earning 
an  honest  livelihood,  while  yet  they  would  express  the  coldness 
that  society  should  feel  towards  a man  who  has  failed  to  satisfy 
just  claims — coldness  rising  to  disapproval  if  he  makes  no  effort 
to  satisfy  them.  Thus  a bankrupt — so  long  as  his  debts  remain 
unpaid — should,  I think,  be  placed  on  a level  with  a pauper  in 
respect  of  all  political  rights ; and  the  protection  from  his 


CHAP.  Ill  RELATIONS  OF  GOVERNMENT  TO  INDUSTRY  431 


creditors  afforded  him  by  bankruptcy  should  be  made  con- 
ditional on  his  name  being  kept  in  a register  open  to  the 
inspection  of  all  persons  in  the  place  in  which  he  trades.  This 
latter  provision,  indeed,  seems  expedient  on  a different  gi’ound, 
of  which  we  have  before  taken  note ; namely,  for  the  due 
information  of  all  persons  who  may  hereafter  have  dealings 
with  the  bankrupt. 

I have  distinguished  as  a special  mode  of  governmental 
interference  that  which  operates  by  giving  a definite  inter- 
pi’etation  to  customary  engagements.  Here  again  a line  re- 
quires to  be  carefully  drawn  between  an  impartial  effort  to 
ascertain  and  define  the  probable  meaning  of  the  contracting 
parties, — which  is  obviously  an  indispensable  function  of  the 
judicature  in  case  of  di.sputes, — and  an  attempt  to  modify  what 
is  held  to  be  a bad  custom ; especially  since  in  the  development 
of  our  own  “judge-made”  law,  the  latter  attempt  has  often 
been  made  in  the  guise  of  the  former.  Such  interference  by 
mere  interpretation,  which  will  only  be  operative  if  the  persons, 
affected  do  not  bar  it  by  express  contract,  is  obviously  of  the 
very  lowest  degree  of  intensity,  politically  speaking,  and  hardly 
amounts  to  a sensible  restriction  on  liberty;  and  it  cannot  be 
effective  if  the  persons  concen  d are  decidedly  averse  to  the 
change  sought  to  be  introduced;  but  where  there  is  no  such 
aversion  it  may  sometimes  have  important  economic  effects  by 
overcoming  the  “friction”  of  mere  carelessness  and  ignorance, 
or  by  forcing  the  tacit  combination  of  persons  who  gain  by  the 
old  bad  custom  to  become  open  and  aggressive,  and  so  pointing 
it  out  for  successful  resistance. 

This  interpretative  or  quasi-interpretative  intervention  of 
law  has  been  largely  extended  to  the  implied  contracts  or  un- 
derstandings involved  in  different  economic  relations.  Thus  the 
Law  of  Partnership  and  the  Law  of  Agency  largely  consist  of 
definitions  or  interpretations  of  this  kind,  designed  to  prevent 
the  disappointment  of  normal  expectations.  So  far  as  such 
legal  definition  of  rights  and  obligations  merely  imposes  on  the 
persons  concerned  the  necessity  of  making  express  contracts  and 
announcements,  if  they  wish  to  avoid  the  obligations  that  the 
law  defines  as  normal,  it  does  not  materially  restrict  natural 
liberty;  it  is  only  where  this  avoidance  is  not  allowed,  that 
the  restriction  becomes  palpable  and  serious.  For  instance,  the 


432 


POLITICAL  ECONOMY 


BOOK  ni 


legal  obligation  on  common  carriers  to  receive  the  goods  of  all 
applicants  on  similar  terms  is  merely  an  interpretation  of  a 
common  understanding,  if  it  can  be  evaded  by  giving  fall 
public  notice;  but  if  it  carmot  be  so  evaded,  it  becomes  a 
material  interference  with  laisser  faire. 

§ 6.  Similar  delicate  questions  as  to  the  line  to  be  drawn 
between  the  intervention  of  government  to  protect,  and  its  inter- 
ference to  control,  the  freedom  of  individuals,  arise  when  we  try 
to  determine  exactly  the  hmits  of  the  right  of  property  according 
to  the  system  of  natural  liberty.  Granting  that  the  natural  right 
of  property  includes  the  power  of  absolutely  excluding  others 
from  the  use  and  enjoyment  of  any  material  thing  over  which  the 
right  has  been  acquired,  it  still  remains  to  be  asked  what  kinds 
of  things  natural  Liberty  would  allow  to  be  thus  appropriated — 
how  far,  in  particular,  such  appropriation  should  be  allowed  with 
regard  to  land,  the  great  permanent  instrument  and  store  of 
material  for  human  industry.  The  extremest  advocates  of  laisser 
Jhire  have  never  disputed  either  the  justice  or  the  expediency  of 
keeping  in  common  ownership  certain  portions  of  land  obviously 
more  useful  when  freely  used  in  common — such  as  roads,  rivers, 
and  other  portions  required  for  communication  and  conveyance. 
Further,  in  modem  European  countries  even  such  land  as  has 
been  allowed  to  pass  completely  into  private  ownership  has  been 
held  liable  to  special  burdens  for  public  purposes ; and  the  right 
of  the  community  to  take  from  individuals  land  specially  needed 
for  important  public  objects,  at  a price  corresponding  to  the 
market  value  that  it  would  have  had  independently  of  such 
special  need, — which  in  recent  times  has  been  generally  admitted 
and  to  some  extent  exercised  in  the  important  case  of  railways, 
— may  perhaps  fairly  be  regarded  not  as  an  encroachment  on 
private  ownership,  but  as  a reservation  tacitly  understood  when 
such  ownership  was  allowed.  Again,  so  far  as  a community 
owns  land  as  yet  unappropriated,  but  likely  to  be  more  useful  if 
allowed  to  pass  into  private  ownership,  it  is  a difficult  and 
subtle  question  to  determine  whether  the  principles  of  natural 
liberty  prescribe  any  one  method  of  effecting  this  transition 
rather  than  any  other ; also  whether  any  of  the  various  compli- 
cated and  elaborate  regulations  with  regard  to  the  sale  of  public  • 
land,  which  in  English  and  other  colonies  have  been  adopted  or 
proposed  with  a view  to  improve  the  process  of  colonisation, 


CHAP.  Ill  RELATIONS  OF  GOVERNMENT  TO  INDUSTRY  433 


can  properly  be  regarded  as  a species  of  governmental  inter- 
ference \ 

A different  kind  of  problem  has  somewhat  perplexed  and, 
divided  the  adherents  of  natural  liberty  in  respect  of  property 
in  the  results  of  intellectual  labour.  On  the  one  hand,  it  has 
seemed  clear  that  the  man  who  works  with  his  brain  has  as 
much  right  to  have  the  fruits  of  his  labour  secured  to  him  as 
the  man  who  works  with  his  hands.  On  the  other  hand,  since 
the  only  effective  way  of  protecting  such  fruits  is  to  prohibit 
imitation  on  the  part  of  others,  it  is  not  surprising  that  this 
very  exceptional  interference  with  the  freedom  of  action  of 
those  others  should  have  been  thought  by  some  persons  to 
conflict  with  the  principles  of  natural  liberty.  In  the  case  of 
cop3'right,  however,  this  latter  view  appears  to  me  superficial; 
so  far  at  least  as  the  protection  is  limited  to  results  which 
persons  other  than  the  author  protected  could  not  conceivably 
have  produced  by  independent  effort — as  is  mainly  the  case 
with  copyright.  It  can  hardly  be  an  interference  with  .4’s 
natural  liberty  to  exclude  him,  in  the  interest  of  B,  from  the 
gratuitous  use  of  utilities  which  he  could  not  possibly  have 
enjoj^ed  except  as  a result  of  B’s  labour.  Hence  I should  be 
disposed  to  regard  at  least  any  limitation  of  copyright  to  a 
period  falling  short  of  the  author’s  life^,  as  an  encroachment 
on  natural  liberty  in  the  interests  of  the  community.  But 
I should  hesitate  to  take  a similar  view  in  the  case  of  patents ; 
since  here  the  difficult^"  of  preventing  the  protection  of  A from 
interfering  with  the  independent  action  of  B seems  practically 
insuperable.  It  is  almost  always  within  the  limits  of  human 
probability  that  in  protecting  a technical  invention  we  may  be 
suppressing  the  possibility  of  a similar  invention  which  might 
otherwise  have  been  made  by  some  one  else ; indeed  such  co- 
incidence of  inventions  may  even  be  said  to  be  positively 
probable,  whenever  several  ingenious  minds  are  simultaneously 
pondering  over  the  best  method  of  meeting  some  definite 
technical  need.  Owing  to  this  inevitable  danger  of  conflicting 
claims,  and  to  the  undeniable  hampering  of  industrial  progress 
that  is  consequently  liable  to  result  from  the  protection  of  the 

^ Cf.  post,  c.  iv.  § 12. 

- As  I shall  presenUy  point  out,  the  right  to  control  any  kind  of  property 
after  death  is  a doubtful  point  in  the  system  of  natural  liberty. 

S.  P.  E. 


28 


434 


POLITICAL  ECONOMY 


BOOK  in 


first  inventor,  it  seems  hardly  possible  to  frame  the  regulations 
of  a patent  law  on  any  other  principle  than  that  of  carefully 
balancing  opposite  expediencies.  Indeed  some  able  men  who 
are  not  generally  socialistic  in  their  views,  nor  in  any  way 
opposed  to  the  principle  of  copyright,  have  yet  thought  it  de- 
sirable on . the  whole  to  do  away  with  patents  altogether,  and  to 
leave  inventors  to  be  rewarded  by  the  State.  And  the  majority 
of  competent  judges,  who  consider  it  practically  impo.ssible  to 
give  the  inventor  sufficient  inducement  to  work  except  by  se- 
curing him  a legal  monopoly  of  the  results  of  his  labour,  are 
yet  generally  of  opinion  that  the  duration  of  this  monopoly 
should  be  limited  to  a comparatively  short  term  of  years,  in 
the  interests  of  industrial  progress : and  many  of  them  think 
it  further  desirable  that  a patentee  should  be  compelled  to 
allow  his  invention  to  be  used  by  others,  at  a price  fixed 
by  government,  under  certain  circumstances  ; that  is,  either 
(1)  when  the  patentee  does  not  use  the  invention  himself, 
or  (2)  when  any  other  inventor  has  made  substantial  im- 
provements in  it. 

Another  doubtful  point  in  the  definition  of  the  rights  of 
private  property,  on  the  principles  of  laisser  faire,  relates  to 
the  right  of  bequest.  Many  even  among  the  jurists  of  an  earlier 
age,  in  which  the  hypothesis  of  a Law  of  Nature  was  generally 
accepted,  prefeiTed  to  treat  the  right  of  bequest  as  established 
by  Positive  rather  than  Natural  law ; and  in  fact  it  is  difficult 
to  maintain  that  we  interfere  with  a man’s  natural  liberty  by 
not  letting  his  wishes  determine  the  relations  of  other  men  to 
a material  world  in  which  he  is  no  longer  living.  There  are, 
indeed,  two  obvious  and  forcible  reasons  for  allowing  free 
bequest  in  a general  way,  independently  of  the  actual  sentiment 
in  its  favour;  first,  that  any  law  prohibiting  it  would  be  likely 
to  be  frustrated  by  gifts  before  death ; and  secondly,  that  such 
a law,  so  far  as  effective,  would  tend  to  diminish  seriously  the 
inducements  to  productive  labour  and  care  during  the  closing 
period  of  a man’s  life.  But  arguments  of  this  kind  can  hardly 
be  pressed  to  prove  the  inexpediency  of  all  restrictions  on  free- 
dom of  bequest ; and  any  such  restrictions  that  tend  to  increase 
the  utility  of  the  wealth  bequeathed  by  enlarging  the  freedom 
of  action  of  those  to  whose  management  it  is  left,  may  fairly  be 
advocated  in  the  name  of  natural  liberty,  no  less  than  in  the 


CHAP,  in  RELATIONS  OF  GOVERNMENT  TO  INDUSTRY  435 


interests  of  production.  And  in  fact  the  tendency  of  modern 
English  legislation  has  been  to  introduce,  to  a continually 
greater  extent,  two  different  kinds  of  limitations  on  the  indi- 
vidual’s right  of  disposing  of  his  property  after  death;  first,  in  the 
case  of  bequests  for  public  purposes,  by  treating  the  testator’s 
dispositions  as  liable  to  an  indefinite  amount  of  revision  and 
modification  in  the  interests  of  the  public,  after  a certain  interval 
of  time  has  elapsed ; and,  secondly,  in  the  case  of  private  be- 
quests, by  restricting  the  testator’s  power  of  preventing  the 
alienation  of  the  property  bequeathed,  on  the  ground  that  such 
inalienable  ownership  is  liable  to  lead  to  inferior  management, 
especially  in  the  case  of  land. 

Again,  since  through  accident,  neglect,  or  indecision  a certain 
number  of  persons  die  without  exercising  the  right  of  bequest, 
the  government  has  the  strictly  necessary  function  of  deter- 
mining in  such  cases  the  devolution  of  the  property  left 
behind.  Ceteris  paribus  the  obvious  end  to  be  aimed  at  in  dis- 
tributing such  intestate  inheritances  is  to  satisfy  as  far  as 
possible  any  definite  expectations  which  the  general  habits  of 
bequest  may  have  created : but  the  guidance  of  this  principle  is 
liable  to  be  obscure  and  ambiguous,  even  on  fundamental  points: 
and  even  where  it  is  not  so,  it  cannot  be  regarded  as  an  inter- 
ference with  natural  liberty  to  deviate  from  the  ordinary  cus- 
toms of  bequest,  in  order  to  adopt  an  economically  preferable 
rule  of  distribution — as  {e.g.)  by  abolishing  the  law  of  primo- 
geniture in  a country  where  it  is  found  to  have  an  unfavourable 
effect  on  agriculture. 

In  short,  neither  “ protection  to  property  ” nor  “ enforce- 
“ment  of  contract”  turns  out  to  be  in  practice  so  simple  a 
matter  as  some  theorists  appear  to  suppose.  The  determina- 
tion of  substantive  or  primary  rights  under  either  of  these  heads 
involves  disputed  questions  of  great  moment,  in  the  settlement 
of  which  the  effects  of  different  rules  on  the  production  of 
wealth  have  to  be  carefully  considered ; and  further  questions 
of  hardly  less  importance  arise  in  the  regulation  of  procedure 
and  penalties,  especially  in  respect  of  enforcement  of  contract — 
e.g.,  as  to  the  nature  of  the  penalties  for  non-payment  of  debt, 
and  the  order  of  priority  in  claims  to  be  allowed  to  different 
classes  of  creditors.  The  consideration  of  economic  conse- 
quences should  in  my  opinion  be  generally  paramount  in 

28—2 


436 


POLITICAL  ECONOMY 


BOOK  III 


deciding  important  issues  in  these  departments  of  law ; as,  for 
instance,  in  determining  the  law  of  Bankruptcy,  the  law  of 
Patents,  and  the  main  restrictions  on  Bequest.  Since,  however, 
this  view  has  not  generally  been  taken  by  jurists  and  legisla- 
tors, it  has  seemed  to  me  best  to  treat  these  questions  as  lying 
on  a kind  of  debatable  border-ground  where  the  Art  of 
Political  Economy  merges  in  the  vdder  Art  of  Politics. 


CHAPTER  IV. 


IMPORTANT  CASES  OF  GOVERNMENTAL  INTERFERENCE 
TO  PROMOTE  PRODUCTION. 

§ 1.  I NOW  pass  to  the  discussion  of  the  chief  actual  cases 
in  which  modem  governments  have  distinctly  encroached  on 
the  system  of  ladsser  faire  in  the  interests  of  production, 
either  by  taking  into  their  own  management  certain  depart- 
ments of  industry,  or  by  regulating  or  assisting  the  under- 
takings of  private  individuals  or  companies.  I ought  to  premise 
that  in  speaking  of  “governments”  I include  both  “ central  ” and 
“ local  ” or  “ provincial  ” governments  and  do  not  generally  take 
note  of  the  division  of  functions  between  the  two  kinds  of 
organs.  If  my  limits  allowed,  it  would  be  interesting  to  discuss 
the  economic  considerations  that  have  to  be  taken  into  account 
in  determining  this  division.  We  might  notice,  in  the  first 
place,  the  analogy  between  the  general  arguments  for  or  against 
centralisation  of  governmental  functions  and  the  arguments  for 
“ large-scale  ” and  “ small-scale  ” production  in  private  industry : 
in  either  case  we  have  to  balance  the  advantages  of  more  special 
experience  in  managers  and  more  keen  concern  for  details  of 
the  result,  against  the  advantages  of  more  systematic  manage- 
ment and  generally  more  comprehensive  views  Rnd  a higher 
quality  of  skill.  Again,  for  governmental  work  in  which  '.parti- 
cular districts  are  solely  or  mainly  interested,  it  is  natural  to 
select  the  local  governments  of  such  districts;  on  the  other 
hand,  care  has  sometimes  to  be  taken  that  the  local  government 
does  not  exercise  its  functions  in  the  interest  of  its  locality 
where  that  is  opposed  to  the  interest  of  the  whole  country, — e.g., 
if  a single  town  or  district  has  the  management  of  an,  important 
railroad  or  waterway,  it  may  be  tempted  to  make  the  greatest 


438 


POLITICAL  ECONOMY 


BOOK  m 


net  profit  out  of  its  monopoly  by  a rate  of  charge  inconveniently 
high  for  the  rest  of  the  community.  These  and  other  general 
considerations  might  be  illustrated  under  more  than  one  of  the 
heads  that  we  are  about  to  discuss;  but  on  the  whole  I have 
thought  it  best  to  avoid  all  questions  relating  to  the  structure  of 
government,  and  confine  myself  to  the  determination  of  its 
economic  functions. 

If  we  put  on  one  side  (1)  the  promotion  of  Education  and 
Culture,  which  it  is  not  usual  to  regard  simply,  or  even 
mainly,  from  a productional  point  of  view,  and  (2)  the 
“ burning  question  ” of  protection  to  native  industry’, — which  I 
reserve  for  a separate  chapter, — we  find  that  the  departments 
of  production  with  which  governments  have  actually  concerned 
themselves  are  chiefly  various  branches  of  what  may  be  called 
the  machinery  of  transfer ; including  under  this  term,  not  only 
Conveyance  and  Communication, — the  establishment  and  man- 
agement of  roads  and  bridges,  canals  and  railroads,  harbours  and 
lighthouses,  the  organisation  for  sending  letters  and  telegrams, 
&c., — but  also  the  machinery  of  Exchange ; i.e.,  the  issue  of 
metallic  and  paper  currency,  and  the  business  of  banking  so  far 
as  it  is  connected  with  currency.  The  universality  of  the  need 
of  the  commodities  furnished  by  these  various  businesses  has 
been  sometimes  put  forward  as  the  justification  for  governmental 
intervention ; it  has  been  said  that  the  provision  for  such  com- 
modities, being  a matter  of  common  concern,  is  properly  under- 
taken or  controlled  by  the  community  through  its  government. 
But  this  reason  is  not  sufficiently  special ; since  the  needs  of 
food,  fuel,  clothing,  and  shelter — the  pro\dsion  for  which  is 
almost  universally  left  to  private  enterprise  in  modern  com- 
munities— are  even  more  urgent  and  universal  than  the  needs 
of  conveyance  and  communication : and,  further,  the  reason 
just  mentioned  would  not  explain  why  governments  should  so 
largely  leave  the  provision  for  the  moveable  instruments  of 
conveyance — carriages,  ships,  &c. — to  private  enterprise,  while 
undertaking  the  establishment  of  the  permanent  and  stationary 
instruments — roads,  canals,  harbours,  &c.  The  valid  arguments 
for  governmental  interference  in  these  departments  are  rather, 
in  my  opinion,  the  following.  Firstly,  organisation  on  a ver}- 
large  scale — and  in  some  cases  organisation  under  a single 
control — is  either  necessary  or  obviously  most  expedient  in 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE 


439 


important  parts  of  the  businesses  concerned  with  transfer ; 
so  that  if  they  were  left  to  private  enterprise,  either  (a) 
some  important  utilities  would  not  be  provided  at  all,  or 
would  be  more  expensive  or  inferior  in  quality;  or  (6)  the 
business  of  providing  them  would  become  the  monopoly  of 
private  persons,  whose  interest  would  not  generally  coincide 
with  the  interest  of  the  public.  Secondly,  there  is  a special 
probability  that  the  advantage  to  the  public  of  improvements 
in  the  machinery  of  transfer  may  exceed  very  greatly  the  direct 
utilities  to  the  persons  who  primarily  benefit  by  them ; which 
latter  are  generally  the  only  utilities  for  which  the  provider  is 
able  to  obtain  remuneration  in  the  way  of  free  exchange. 

There  are  besides  certain  special  drawbacks  or  obstacles 
incident  to  the  production  of  some  of  these  commodities  by 
private  enterprise,  which  will  appear  when  we  consider  some 
of  the  businesses  in  detail. 

§ 2.  Ordinary  Roads.  Both  the  above  reasons  for  govern- 
mental intervention  apply  forcibly  to  the  case  of  ordinary  road- 
making. The  indirect  advantages  derived  from  good  roads, 
both  in  the  improved  organisation  of  national  industry  which 
results  from  the  development  of  internal  trade,  and  in  the 
general  spread  of  intelligence,  are  universally  recognised ; while 
yet  the  utilities  of  transit,  as  estimated  by  the  individuals  who 
would  purchase  them,  would  not  be  sufficient  to  enable  private 
undertakers  to  construct  remuneratively  the  less  frequented  roads, 
at  any  rate  if  the  land  had  to  be  bought ; so  that  to  make  the 
road  system  of  a modem  civilised  community  as  complete  as  is  on 
public  grounds  to  be  desired,  the  intervention  of  government — 
central  or  local — would  seem  to  be  almost  indispensable.  On  the 
other  hand,  the  more  frequented  roads  which  it  would  undoubt- 
edly be  profitable  to  construct,  would  always  be  in  the  condition 
of  partial  monopoly ; and,  therefore,  there  would  be  no  general 
probability  that  it  would  be  most  profitable  for  the  monopolist 
owners  of  the  roads  to  charge  such  a price  for  their  use,  or  to 
keep  them  in  such  a condition,  as  would  afford  the  maximum  of 
public  utility.  The  monopoly,  no  doubt,  would  always  be  partly 
controlled  by  the  fear  that  excessive  tolls  or  gross  neglect  would 
lead  to  the  construction  of  a new  road ; but  if  the  new  road  were 
less  convenient  to  the  majority  of  those  who  used  it,  and  were, 
therefore,  liable  to  be  at  any  time  abandoned  in  favour  of  the 


440 


POLITICAL  ECONOMY 


BOOK  ni 


old  road  if  the  charges  and  conditions  of  the  two  were  equalised, 
its  construction  would  be  too  hazardous  an  undertaking  to  be 
readily  entered  upon. 

Further,  we  have  to  observe  that  the  use  of  roads  managed 
by  private  enterprise  must  necessarily  be  sold ; and  the  expense 
and  inconvenience  involved  in  this  transaction  is  a serious  draw- 
back in  the  case  of  much  frequented  roads.  In  the  extreme 
case  of  the  streets  of  a town  no  one  would  propose  that  the 
expenses  of  construction  or  maintenance  should  be  defrayed  bv 
tolls;  and  this  arrangement  is  now  regarded  as  being  on  the 
whole  undesirable  in  the  case  of  highways  generally — in  spite 
of  its  obvious  equity  from  the  point  of  view  of  distribution. 

The  question,  however,  whether  ordinary  roads  should  be 
generally  managed  by  private  enterprise  has  never  been  a 
practical  one ; chiefly  because  the  portions  of  the  earth’s  surface 
now  employed  for  this  purpose,  have,  to  a great  extent,  been 
used  in  common  from  time  immemorial,  and  so  have  remained 
the  property  of  the  community  using  them,  while  the  rest  of  the 
land  has  gradually  passed  into  private  ownership. 

In  England,  when  the  importance  of  keeping  the  roads  them- 
selves in  good  condition  came,  in  the  eighteenth  century,  to  be 
more  fully  recognised,  the  expenses  were  at  first  defrayed  by 
tolls,  the  management  being  what  may  be  called  quasi-govem- 
mentaV but  the  expense  and  inconvenience  of  collecting  tolls 
has  led  to  the  gradual  abolition  of  this  system,  and  the  defray- 
ment of  expenses  out  of  the  rates.  The  bridges  that  form  part 
of  roads  have  for  the  most  part  been  similarly  dealt  -with ; in 
a few  special  cases,  such  as  the  bridges  over  the  Thames,  the 
construction  has  been  undertaken  by  private  enterprise  on  the 
security  of  tolls ; but  even  these  have,  for  the  most  part,  been 
subsequently  bought  up  by  public  bodies. 

§ 3.  Canals  and  Railways.  The  case  is  otherwise  with 
canals  and  railways.  Many  of  these  more  artificial  and  elaborate 
ways  of  communication  have  been  constructed  and  managed 
by  private  enterprise.  Still  in  some  of  these  cases  the  funds 

^ I refer  to  the  system  of  “turnpike  trusts,”  by  which  the  management  of 
different  turnpike  roads  was  placed  in  the  hands  of  different  bodies  of  trustees, 
partly  public  and  partly  private,  who  obtained  private  capital  on  loan,  paying 
the  interest  with  the  proceeds  of  the  tolls,  but  derived  no  personal  profit  from 
the  business. 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE 


441 


for  their  construction  have  been  partly  obtained  by  the  aid  of 
government,  in  the  form  of  a guarantee  of  interest  or  other- 
wise ; while  even  where  the  capital  of  railways  has  been 
raised  without  any  assistance  from  the  national  exchequer, 
the  companies  providing  it — in  fully  peopled  countries* — have 
usually  had  to  obtain  from  government  exceptional  powers 
for  the  compulsory  purchase  of  land,  in  return  for  which  they 
have  had  to  submit  to  a certain  amount  of  governmental  regu- 
lation. In  many  other  cases  railways  and  canals  have  been 
altogether  constructed  at  the  public  expense,  and  managed  by 
government  officials.  The  actual  motive  for  these  various  kinds 
and  degrees  of  governmental  intervention  has  generally  been 
that  otherwise  it  did  not  seem  likely  that  the  improvements 
in  question  would  be  executed  at  all,  the  prospect  of  profit  to 
private  undertakers  not  being  sufficiently  brilliant  and  certain 
to  overcome  the  difficulty  of  collecting  capital  of  the  large 
amount  required.  In  the  case  of  railways  in  particular,  the 
power  of  compulsory  purchase  of  land  has  almost  always  been 
found  indispensable ; without  it,  the  most  enterprising  com- 
panies would  have  shrunk  from  the  task  of  bargaining  with 
a large  number  of  private  landowners,  each  able  by  his  refusal 
to  increase  the  expense  and  diminish  the  utility  of  the  line  very 
materially.  The  practical  issue  has,  therefore,  not  been  between 
private  enterprise  pure  and  simple,  and  any  form  of  governmental 
interference,  but  merely  as  to  the  kind  and  degree  of  the  latter. 
For,  on  the  very  principles  of  natural  liberty  as  ordinarily  under- 
stood”, it  seems  due  to  the  owners  of  property  on  whom  a forced 
exchange  is  imposed,  that  the  power  to  compel  such  exchange 
should  only  be  granted  after  careful  investigation  has  shewn 
a decided  prospect  of  public  advantage  from  it;  while  yet  the 
necessity  of  making  this  investigation,  by  whatever  machinery 
it  is  conducted,  renders  it  difficult  to  exclude  altogether  the  kind 
of  illegitimate  influences  that  we  before  noted  as  a danger 
incident  to  governmental  management.  So,  again,  when  a 
railway  has  been  constructed,  the  more  or  less  complete 
monopoly  which  it  is  sure  to  have  of  the  facilities  of  conveyance 
between  certain  places  on  its  line  is,  in  part  at  least,  due  to  the 

* In  the  United  States  and  the  Dominion  of  Canada  the  construction  of 
great  railways  has  been  subvented  by  large  grants  of  land  as  yet  unoccupied. 

- See,  however,  the  note  at  the  end  of  the  chapter. 


442 


POLITICAL  ECONOMY 


BOOK  in 


necessity  of  obtaining  governmental  sanction  for  any  rival 
undertaking ; hence  government , is  specially  called  upon  to 
take  care,  if  possible,  that  the  interests  of  the  public  are  not 
sacrificed  to  those  of  the  monopolists.  Further,  the  large 
amount  of  capital  required  for  the  construction  of  a railway 
or  a canal  generally  excludes  the  independent  enterprise  of 
individual  capitalists  from  this  department : the  choice,  there- 
fore, lies  practically  between  governmental  agency  and  the 
agency,  under  governmental  control  and  regulation,  of  large 
joint-stock  companies ; and  we  have  before  observed  that  the 
latter  is  likely  to  exhibit  somewhat  the  same  defects  as  govern- 
mental agency,  in  comparison  with  management  by  private  em- 
ployers. The  experience  of  different  European  countries  during 
the  last  fifty  years  has  afforded  considerable  means  of  comparing 
the  two  systems : and  the  drawbacks  that  it  has  shewn  to  exist 
in  the  system  of  management  by  regulated  joint-stock  companies 
may  be  stated  as  follows — taking  for  simplicity  the  case  of 
railways,  which  has  now  the  greatest  practical  importance. 

1.  In  Construction,  want  of  system,  leading  to  unnecessaiy 
outlay  ; while  yet  gaps  are  left  which  it  would  be  for  the  interest 
of  the  community  to  fill  up ; since  local  lines  not  likely  to  bring 
additional  profit  to  shareholders  might  often  pay  their  own 
expenses  and  greatly  benefit  their  districts. 

2.  In  respect  of  Management,  again,  so  long  as  the  separate 
companies  are  fighting  each  other  for  .traffic,  the  public  loses  by 
the  incoherent  organisation  of  its  railroads — through  difficulties 
of  through -booking  and  imperfect  correspondence — probably 
more  than  it  gains  in  cheapness  by  competition.  Competition, 
however,  tends  to  be  continually  reduced  by  the  “ fusion  ” or 
“amalgamation”  of  companies,  which  it  is  decidedly  the  interest 
of  the  latter  to  effect ; though  until  it  is  effected  the  desire 
that  each  company  naturally  has  to  arrange  the  amalgamation 
on  the  best  terms  to  itself  tends  to  intensify  rivalry  and  prevent 
any  effective  co-operation  in  the  meanwhile. 

3.  Amalgamation,  however,  increases  the  danger  of  di- 
vergence between  public  and  private  interests,  that  we  have 
seen  to  be  involved  in  monopoly.  Nor  has  an}i;hing  been 
gained,  in  England,  by  the  attempt  made  to  secure  the  pubhc 
interest,  when  the  construction  of  the  line  is  authorised,  by 
imposing  limits  on  the  fares  charged ; and  attempts  of  this 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE 


443 


kind  seem  generally  likely  to  fail,  since  the  difficulty  of  fore- 
casting the  future  conditions  of  a business  like  railway  travel- 
ling would  render  it  necessary  to  fix  the  limits  of  charges  at 
the  outset  so  high  that  it  would  probably  not  be  the  interest 
of  the  companies  to  come  up  to  it,  in  case  the  undertaking 
was  successful. 

Again,  the  attempt  to  keep  down  the  profits  of  such  a 
monopoly,  by  fixing  a maximum  dividend,  is  open  to  the  serious 
economic  objection  that,  when  the  maximum  is  reached,  the 
company  ceases  to  have  any  interest  in  preventing  waste  in 
management.  This  objection,  however,  might  to  a considerable 
extent  be  obviated  by  allowing  the  company  to  appropriate 
a certain  share  of  the  profits  made  beyond  a certain  limit, 
on  condition  that  the  remainder  be  applied  to  the  reduction  of 
charges.  And  in  England  the  profits  of  railways  have  as  yet 
not  reached  the  point  at  which  this  particular  objection  would 
become  practically  important.  Here  the  actual  divergence  of 
private  from  public  interest  lies  mainly  in  the  fact  that  the 
former  excludes  the  possibility  of  such  a reduction  of  fares  as 
might  greatly  increase  the  utility  of  the  railways  at  the  risk  of 
a slight  loss  in  net  revenue — a risk  which  it  would  obviously  be 
expedient  for  the  community  to  run  in  the  circumstances,  but 
not  for  private  shareholders  ^ 

On  the  other  hand,  in  a country  like  our  own,  in  which  large 
accumulations  of  capital  are  continually  being  made,  and  any 
opening  for  its  profitable  emplo3rment  is  eagerly  seized,  there  are 
great  counterbalancing  advantages  in  leaving  the  field  to  joint- 
stock  companies : and  there  seems  no  reason  to  doubt  that  this 
agency  has  actually  supplied  us  with  railways  both  more  amply 
and  at  an  earlier  period  than  governmental  agency  would  have 
done,  and  probably  with  a closer  adaptation  of  the  order  in  time 
of  their  construction  to  the  needs  of  industry. 

On  the  whole,  the  conclusion  would  seem  to  be,  in  the  case 
of  undertakings  of  this  kind,  that  where  the  work  is  likely  to  be 

^ On  the  vexed  question  of  “differential  rates”  I reserve  what  I have  to  say 
for  a subsequent  chapter  (viii.  § 4),  in  which  I treat  of  the  principles  on  which 
the  governmental  management  of  such  a business  as  railway  conveyance  ought 
to  be  conducted.  Here  I will  only  say  that  the  possible  divergence  on  this  point 
between  the  interest  of  the  public  and  the  real  private  interest  of  the  railway 
company  appears  to  me  more  limited  in  extent  and  importance  than  it  is  usually 
supposed  to  be  by  the  traders  who  complain  of  differential  rates. 


444 


POLITICAL  ECONOMY 


BOOK  III 


done  by  joint-stock  companies  if  government  does  not  interfere, 
it  should  be  left  to  the  former  during  the  first  and  more  tenta- 
tive stage  of  the  undertaking,  and  even  that  private  enterprise 
should  be  encouraged  by  concessions  tolerably  liberal  as  to 
charges,  &c.,  for  a limited  period;  but  that  the  ultimate  interests 
of  the  community  should  be  secured  by  giving  the  government 
the  right  of  either  freely  revising  the  charges  at  the  end  of 
the  period,  or  taking  the  business  entirely  into  its  manage- 
ment, on  the  payment  of  a fair  price  for  the  material  capital 
employed,  but  without  any  extra  sum  in  consideration  of  actual 
or  expected  profits  h 

In  the  case  of  railways  it  is  not  practically  possible  to 
separate  the  general  management  of  the  machinery  of  con- 
veyance from  the  management  of  the  roads  over  which  it 
works-.  But,  as  I have  before  observed,  the  case  is  different 
with  ordinary  roads  and  canals.  Here  the  provision  and 
management  of  the  moveable  instruments  of  conveyance  has 
been  generally  left  to  .private  enterprise,  without  any  govern- 
mental control  for  economic  purposes,  except  as  regards  the 
prices  charged  for  the  use  of  vehicles  plying  in  the  streets  of 
towns.  The  ground  for  this  latter  exception  lies  in  the  great 
convenience  to  the  consumer  of  a uniform  and  stable  price : 
otherwise  the  use  of  hackney  carriages  would  seem  to  be 
a commodity  of  which  the  value  might  be  left  to  be  deter- 
mined by  open  competition,  as  advantageously  as  the  value 
of  any  other  article. 

I 4.  The  Post  Office,  i:c.  The  conveyance  of  letters  is  the 
department  in  which  the  advantages  and  success  of  govern- 
mental interference  . are  most  generally  admitted — with  the 
exception,  perhaps,  of  coinage.  The  reason  is  that,  while  the 
business  is  in  the  main  of  a routine  kind,  adapted  to  govem- 

' As  I shall  presently  point  out,  the  same  principles  are  applicable  to  other 
businesses  besides  those  connected  with  transfer,  provided  they  are  of  a kind  that 
tend  to  become  monopolies.  It  may  be  urged  as  a defect  in  the  arrangement 
proposed  that  it  would  not  give  the  company  sufficient  interest  in  the  manage- 
ment of  its  business  during  the  concluding  part  of  the  period.  I think  that 
there  is  some  force  in  this  objection;  but  that  it  might  be  obviated  by  a 
voluntary  agreement  between  the  government  and  the  company,  made  at  a date 
somewhat  earlier  than  the  termination  of  the  legal  independence  of  the 
company. 

- When  railways  were  first  introduced,  it  was  intended  that  the  use  of  them 
should  be  made  available  to  the  carriages  of  private  individuals. 


CHAP.  IV  CASES  OF  GOVERN]V[ENTAL  INTERFERENCE 


44.5 


mental  agency,  both  the  gain  in  convenience  and  the  saving 
of  labour  secured  by  unity  of  management  are  specially  great ; 
since  the  cost  of  carrying  letters  from  office  to  office  is  but 
slightly  increased  by  any  increase  in  their  number,  while  the 
reduction  in  the  ratio  of  labour  to  utility  in  the  work  of 
distribution,  obtained  by  the  monopoly  of  it  within  each  area 
of  distribution,  is  very  considerable.  The  saving  through  unity 
of  management  is  less  in  the  case  of  bulky  or  heavy  parcels, 
since  each  additional  parcel  tends  materially  to  increase  the 
aggregate  of  carriage ; but  when  a national  machinery  exists 
for  the  distribution  of  letters  and  light  parcels,  there  seems  a 
clear  advantage  in  using  it  also  for  the  distribution  of  larger 
parcels. 

Before  I pass  to  consider  the  other  department  of  what 
I have  called  the  machinery  of  transfer, — namely,  exchange, — it 
may  be  convenient  to  notice  a case  of  governmental  interference 
which  does  not  come  under  this  head,  but  which  in  other 
respects  has  important  economic  affinities  to  the  case  of  rail- 
ways : I mean  the  provision  of  light  and  water.  The  analogy 
consists  in  the  fact  that  these  commodities  have  to  be  brought 
to  the  consumers  by  means  of  a special  kind  of  path  (pipes, 
wires),  which  can  only  be  constructed  by  obtaining  the  partial 
use  of  long  strips  of  land;  these  must  either  (1)  be  public 
roads  (as  is  ordinarily  the  case),  or  (2)  be  obtained  by  com- 
pulsory sale : so  that  in  either  case  some  degi'ee  of  govern- 
mental interference  would  be  indispensable.  Further,  the 
expense  of  constructing  any  such  special  paths  of  conveyance, 
in  a town  or  any  thickly  inhabited  district,  would  be  to  a 
great  extent  the  same  whether  the  consumers  supplied  by  it 
were  all  the  inhabitants  of  the  district  in  question  or  only 
a scattered  portion  of  them ; hence  the  saving  of  cost  ob- 
tained by  keeping  the  whole  supply  of  a certain  area  under 
one  management  is  so  great  as  to  render  a practical  monopoly 
manifestly  the  most  economic  arrangement.  On  these  grounds 
it  is  generally  agreed  that  unrestricted  competition,  though  it 
may  be  transiently  useful,  is  not  to  be  regarded  as  the  normal 
condition  of  these  branches  of  production:  the  issue  is  rather 
between  governmental  regulation  and  governmental  manage- 
ment,  and  is  to  be  decided,  I conceive,  in  much  the  same  way 
as  the  similar  issue  in  the  case  of  railways. 


446 


POLITICAL  ECONOMY 


BOOK  III 


I 5.  Metallic  Currency.  The  claims  of  the  State  to  the 
monopoly  of  coining  have  been  so  generally  admitted  that  the 
most  uncompromising  advocates  of  laisser  faire  have  rarely 
thought  it  needful  even  to  explain  why  they  have  not  ques- 
tioned it : however,  the  abstract  economic  reasons  for  it  may 
be  stated  as  follows.  In  the  first  place,  the  ordinarj"  advan- 
tage to  the  community  from  competition,  in  the  way  of  im- 
proving processes  of  manufacture,  is  hardly  to  be  looked  for  in 
the  case  of  coin.  It  is  the  interest  of  the  community  that  coins 
should  be  as  far  as  possible  hard  to  imitate,  hard  to  tamper 
with,  and  qualified  to  resist  wear  and  tear;  but  the  person 
who  procured  the  coin  from  the  manufacturer  would  not  be 
adequately  impelled  by  motives  of  self-interest  to  aim  at  securing 
excellence  in  these  points,  since  he  would,  of  course,  want  merely 
to  pass  the  money,  and  not  to  keep  it. 

Secondly,  the  admitted  governmental  duty  of  giving  protec- 
tion against  fraud  would  in  any  circumstances  have  to  be 
performed  with  special  vigilance  in  the  case  of  coin,  owing  to 
the  extremely  transitory  interest  that  each  individual  has  in 
the  quality  of  the  money  he  uses ; and  though  this  might  con- 
ceivably be  managed,  if  free  coinage  were  allowed,  by  making 
it  criminal  to  issue  coins  of  the  kind  ordinarily  used,  containing 
less  than  the  ordinary  weight  of  metal ; still  the  prevention  of 
fraud  would  be  far  more  difficult  than  it  is  at  present,  when  all 
coining  is  illegal  and  all  coins  of  the  same  value  are  uniform 
in  shape. 

A supplementary  argument  in  favour  of  governmental 
coining — in  the  abstract’ — lies  in  the  difficulty  of  otherwise 
securing  a fair  allotment  of  the  loss  through  wear  and  tear 
of  standard-  coins.  The  convenience  of  circulation  would  in 
any  case  lead  to  the  establishment — by  common  agreement  if 
not  by  governmental  regulation — of  an  allowable  margin  of 
deficiency  in  weight : but  coins  reduced  through  wear  and  tear 
below  this  margin  would  ultimately  have  to  be  rejected : and 
it  is  obviously  unfair  that  the  consequent  loss  should  fall  on 
the  individual  who,  in  the  passage  of  a coin  from  hand  to 
hand,  happens  to  possess  it  at  the  exact  point  of  the  process 

’ This  advantage  is  not  actually  secured  under  our  present  system. 

2 “Token”  coins  would,  I suppose,  be  convertible  by  the  issuers  on  demand, 
like  bank-notes. 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE 


447 


of  gradual  attrition  at  which  it  falls  below  the  accepted  standard 
of  weight.  There  seems,  however,  no  effectual  way  of  avoiding 
this  result  except  that  government  should  undertake  the  loss 
and  regularly  call  in  light  coin. 

It  is  to  be  noted  that  if  coinage  were  left  to  private  enter- 
prise, the  expenses  of  producing  coins  would  not  really  fall  on 
the  consumer : since,  in  fact,  they  would  not  fall  on  any  one : 
they  would  merely  have  the  effect  of  raising  the  exchange  value 
of  the  coin  proportionally  above  the  value  of  the  metal  con- 
tained in  it.  Hence,  primd  facie,  the  same  result  ought  to  be 
brought  about,  where  coinage  is  monopolised  by  government : 
since,  if  government  bears  the  cost,  the  public  loses  collectively, 
without  any  corresponding  gain  to  the  members  of  the  com- 
munity. On  the  other  hand,  the  advantages  of  gratuitous 
coinage  are  (1)  that  it  guards  against  the  danger  of  slight 
fluctuations  in  the  value  of  coin  relatively  to  bullion,  through 
temporary  over-coinage  and  stoppage  of  the  mint ; and  (2)  that 
otherwise  merchants  engaged  in  foreign  trade — where  coin  is 
merely  used  as  certified  bullion — would  necessarily  lose  the 
mint  charge  in  exporting  the  coins,  and  would,  therefore,  have 
to  raise  the  price  of  foreign  goods  in  order  to  transfer  the  loss 
to  consumers.  But  I know  of  no  evidence  from  experience  to 
shew  that  danger  (1)  is  considerable : and,  as  regards  (2),  there 
does  not  appear  to  be  any  general  reason  why  foreign  trade 
should  be  thus  specially  subsidised  at  the  public  expense ; in 
fact,  as  Jevons  urges,  the  argument  rather  shews  the  desirability 
of  establishing  an  international  currency,  if  it  be  possible. 

The  general  considerations,  therefore,  seem  to  be  in  favour  of 
defi’aying  the  whole  cost  of  coining  by  reduction  in  the  weight 
of  the  coins ; and,  for  the  reason  before  given,  this  cost  ought 
to  include  the  loss  through  wear  and  tear,  which  should  be  borne 
by  the  calling  in  by  government  of  the  coins  that  have  become 
too  light  through  use — provided  that  fraudulent  removal  of  the 
metal  can  be  adequately  prevented. 

§ 6.  So  far  we  have  considered  (1)  uniformity,  and  (2) 
protection  against  (a)  fraud  and  (6)  unequal  incidence  of  loss 
from  wear  and  tear,  as  the  points  at  which  government  should 
aim  in  managing  coinage.  We  have  now  to  take  note  of 
another  important  characteristic  of  a good  medium  of  exchange ; 
i.e.,  stability  in  general  purchasing  power.  Considerable  fluctu- 


448 


POLITICAL  ECONOMY 


BOOK.  Ill 


ations  in  the  value  or  general  purchasing  power  of  money  are 
admitted  to  be  an  evil,  from  the  disappointment  of  expectations 
that  they  cause,  and  the  consequent  uncertainty  in  calculating 
returns  and  remunerations,  which  is  unfavourable  to  steady 
industry  and  careful  trade : we  may,  therefore,  assume  that  it  is 
desirable  to  guard  against  such  fluctuations  so  far  as  this  can 
be  done  effectively  without  causing  worse  evils.  There  are 
two  distinct  ways  in  which  government  may  conceivably  attain 
this  end  while  keeping  its  currency  on  a metallic  basis : either 
(1)  by  actually  modifying  the  conditions  of  value  of  the  metal 
used  for  standard  coins,  or  (2)  by  measuring  its  changes  in 
general  purchasing  power,  and  thus  obtaining  an  ideal  standard 
free  from  the  fluctuations  in  value  of  the  material  medium  of 
exchange.  We  might  distinguish  (1)  and  (2)  as  the  method  of 
real,  and  the  method  of  ideal,  modification  respectively.  Let  us 
consider  the  former  first. 

Where  the  medium  of  exchange,  legally  available  for 
paying  ordinary*  debts  of  money,  consists  of  coins  of  one 
metal  and  notes  convertible  into  coin  on  demand,  I know  no 
means  generally  applicable  for  rendering  its  value  more  stable 
that  could  be  recommended  for  the  use  of  government.  On  the 
one  hand,  a tendency  to  rise  in  value  could  only  be  resisted  by 
promoting  the  use  of  substitutes  for  coin : but  it  is  not  ordinarily 
in  the  power  of  government  to  do  this,  in  an  advanced  industrial 
community,  except  so  far  as  the  use  of  such  substitutes  is 
actually  reduced  by  legal  restrictions.  In  this  latter  case,  no 
doubt  some  effect  in  the  desired  direction  might  be  produced  b}- 
removing  or  modifpng  the  restrictions ; thus  in  England  the 
demand  for  gold  coin  might  be  to  some  extent  lowered  by 
allowing  the  use  of  one-pound  notes ; but  the  effect  of  an}-  such 
measure,  adopted  in  a single  country  only,  is  not  likely  to  be 
great.  On  the  other  hand,  a fall  in  the  purchasing  power  of  gold 
coin  might  conceivably  be  counteracted  by  restricting  coinage ; 
but  as  this  would  tend  to  reduce  the  standard  coins  to  mere 
tokens,  the  remedy  would  be  worse  than  the  disease. 

I hold,  however,  that  a material  improvement  in  the 
prospects  of  stability  of  value  of  the  medium  of  exchange  may 

1 This  is,  debts  that  are  beyond  the  small  amount  for  which  token  coins  are 
legal  tender  and  that  have  not  been  contracted  under  the  express  condition  of 
being  paid  in  some  other  currency. 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE 


449 


be  obtained  by  the  plan  known  as  Bi-metallism ; i.e.,  by  coining 
gold  and  silver  freely  and  making  them  legal  tender  in  unlimited 
amounts  at  a fixed  ratio.  In  a former  part  of  this  work  I have 
already  explained  how  a combination  of  governments  may — up 
to  a certain  point — maintain  the  concurrent  use  of  gold  and 
silver  as  currency  at  a fixed  ratio  of  exchange,  even  when  the 
conditions  of  supply  and  demand  are  such  as  would — if  operating 
unchecked — cause  them  to  be  exchanged  at  a different  ratio. 
To  shew  clearly  the  nature  and  extent  of  the  force  that  such 
a bi-metallic  union  can  exert,  it  will  be  convenient  to  dis- 
tinguish (a)  the  monetary  demand  of  the  combining  com- 
munities from  (6)  the  rest  of  the  demand  for  the  precious 
metals — whether  this  be  the  monetary  demand  of  countries 
outside  the  union,  or  the  industrial  or  rather  non-monetary 
demand.  We  may  call  the  former  (a)  the  “ rated  ” demand  and 
the  latter  (6)  the  “ unrated  ” demand,  or  the  demand  of  the 
outside  market.  The  force,  then,  by  which  the  bi-metallic 
currency  will  tend  to  be  maintained  in  effectual  use — not- 
withstanding changes  in  supply  and  unrated  demand  tending  to 
cause  a market-ratio  of  exchange  between  the  metals  different 
from  the  governmental  ratio — is  the  self-adaptation  which  will 
continually  take  place  in  the  rated  demand,  counteracting  the 
effect  of  such  changes.  When  the  outside  conditions  tend  to 
make  silver  cheap,  the  rated  demand  will  become  a demand  for 
more  silver  and  less  gold ; when  they  tend  to  make  gold  cheap, 
it  will  become  a demand  for  more  gold  and  less  silver ; and  this 
alternation  will  keep  the  market-ratio  approximately  identical 
with  the  mint-ratio,  in  accordance  with  the  ordinary  law  of 
value  as  dependent  on  supply  and  demand ; and  thus — provided 
that  the  tendency  to  divergence  so  counteracted  is  not  too  great 
or  too  prolonged — the  currency  will  remain  effectively  bi-metallic, 
ihough  it  will  be  composed  of  the  two  metals  in  continually 
varying  proportions. 

I lay  stress  on  the  nature  of  the  force  exercised,  because  bi- 
metallists have  sometimes  spoken  as  if  legal  interference  had 
some  power  of  bringing  about  the  concurrent  use  of  the  metals 
at  a fixed  ratio  otherwise  than  through  the  operation  of  the 
ordinary  law  of  supply  and  demand ; while  their  opponents  have 
often  spoken  as  if  the  action  of  governments  in  establishing  a 
fixed  ratio  between  gold  and  silver  money  was  an  attempt  to 
s.  p.  E.  29 


450 


POLITICAL  ECONOMY 


BOOK  III 


resist  natural  laws,  which  must  therefore  be  foredoomed  to 
failure.  Both  these  views  seem  to  me  misleading.  On  the  one 
hand,  though  the  fiat  of  government  can  no  doubt  determine, 
independently  of  any  effect  on  the  relative  market  values  of 
gold  and  silver,  that  these  metals  when  coined  shall  be  legal 
tender  at  a fixed  ratio,  it  cannot  secure  that  they  shall  be 
concurrently  used,  except  very  transiently,  unless  it  also  deter- 
mines the  ratio  in  the  outside  market ; and  the  only  way  in 
which  governments  can  act  on  this  outside  ratio  is  by  changes 
in  the  monetary  demand  as  above  described,  which  of  course 
tend  to  affect  market  value  just  in  the  same  way  as  any  other 
changes  in  demand  would  affect  it.  On  the  other  hand,  it 
seems  to  me  clear,  that  if  the  monetary"  demand  of  the  bi- 
metalhc  union  be  large  relatively  to  the  whole  demand  for  the 
precious  metals,  the  bi-metallic  character  of  the  currency  may 
be  effectually  maintained  in  spite  of  very  considerable  fluctua- 
tions in  the  outside  conditions  influencing  the  market  value  of 
the  metals ; and  that  by  thus  maintaining  it  the  governments 
no  more  attempt  to  override  economic  laws  than  a man  attempts 
to  override  mechanical  laws  by  erecting  dams  or  dykes  against 
floods. 

I will  illustrate  the  process  above  described  by  a h\"pothetical 
case,  which  will  at  the  same  time  shew  how  the  effectiveness 
of  the  bi-metallic  union  will  depend  upon  the  proportion  of  the 
monetary  demand  that'  it  controls  to  the  whole  demand.  Let 
us  assume  that  there  is  a bi-metalhc  union  of  countries  holding 
three-fourths  of  the  whole  stock  of  gold  coin  in  use,  which  we 
will  take  to  be  £700,000,000;  that  when  the  union  begins,  the 
governmental  ratio  of  gold  to  silver  is  that  of  the  market,  say 
1 : 15^ ; and  that  three-eighths  of  the  annual  supply  of  gold 
goes  to  the  bi-metallic  mints,  one-eighth  being  absorbed  by 
the  non-bi-metallic  mints,  and  one-half  by  the  non-monetary 
demand.  Let  us  assume  further,  that  when  the  union  begins, 
the  countries  are  increasing  in  wealth,  and  that  the  annual 
supply  of  gold  and  silver  is  just  sufficient  to  keep  their 
values  unchanged  in  relation  to  commodities  generally.  Now 
let  us  suppose  that,  other  things  remaining  unchanged,  the 
annual  supply  of  gold  falls  from  £20,000,000  to  £i5,000,000. 
Obviously  the  most  that  could  be  required  to  maintain  the 
rated  value  of  gold  in  the  outside  market  would  be  that  the 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE 


451 


same  supply  as  before,  £12,500,000,  should  go  to  satisfy  the 
outside  demand ; but  in  fact  slightly  less  than  this  will  suffice, 
since  the  value  of  gold — and,  therefore,  under  the  bi-metallic 
system,  of  silver  also — will  rise  slightly  in  consequence  of  the 
decreased  supply  of  gold,  and  this  rise  will  cause  a corresponding 
reduction  in  the  unrated  demand  for  both  metals.  This  last 
effect  will  also  involve  a slight  increase  in  the  amount  of  silver 
brought  to  the  bi-metalhc  mints.  The  bi-metallic  currency 
will  thus  tend  to  have  less  gold  in  it  than  before  in  proportion 
to  silver;  but  it  will  not,  therefore,  have  positively  less  gold 
than  before,  since  the  supply  that  still  comes  to  the  bi-metallic 
mints  will  more  than  suffice  to  make  up  for  the  loss  through 
wear  and  tear  of  coins.  And  this  state  of  things  may  be  con- 
ceived to  go  on  for  an  indefinite  time  without  any  tendency 
to  deprive  the  bi-metallic  currency  of  its  gold,  or  to  cause  a 
divergence  between  mint-ratio  and  market-ratio;  though  of 
course  the  proportion  of  gold  coin  to  silver  will  steadily  decrease 
under  the  conditions  supposed. 

If,  however,  we  had  inverted  the  supposed  relation  of  the 
two  monetary  demands, — if  we  had  supposed  a bi-metallic  mint 
absorbing,  before  the  fall  in  production,  only  one-eighth  of  the 
annual  supply,  and  non-bi-metallic  mints  absorbing  three- 
eighths, — the  change  supposed  must  at  once  have  decreased 
the  stock  of  gold  coin  held  by  the  bi-metallic  country;  and 
each  succeeding  year  would  diminish  it  further  until  the 
currency  would  become  practically  a mono-metallic  currency  of 
silver — with  some  gold  coin  probably  circulating  at  a premium. 

Similar  results  would  follow,  mutatis  mutandis,  if  we  supposed 
an  increased  supply  of  silver  instead  of  a decreased  supply  of 
gold;  in  either  case,  the  questions  whether,  and  how  long,  the 
nominally  bi-metallic  currency  can  really  maintain  its  character, 
must  depend  on  the  extent  of  the  rated  demand  as  compared 
with  the  outside  demand,  and  on  the  magnitude  of  the  changes 
that  occur  in  the  outside  conditions  determining  the  value  of 
either  metal. 

Supposing  that  the  bi-metallic  system  is  effectually  main- 
tained, in  the  manner  above  explained,  it  will  evidently  have 
two  effects : (1)  it  will  keep  the  ratio  of  exchange  between  the 
metals  approximately  uniform,  not  only  within  but  also  outside 
the  range  of  the  bi-metallic  union ; and  (2)  it  will  tend  to  make 

29—2 


452 


POLITICAL  ECONOMY 


BOOK  III 


fluctuations  in  the  standard  of  value  less  rapid  and  serious  by 
spreading  the  effect  of  any  change  in  the  conditions  of  supply  of 
either  metal  over  the  whole  aggregate  of  the  world’s  currency, 
instead  of  letting  it  operate  solely  on  that  part  of  the  currency 
which  is  composed  of  the  metal  primarily  affected*.  The  ad- 
vantages of  (2)  are,  I conceive,  generally  admitted;  nor  will  the 
advantages  of  (1)  be  disputed,  if  we  assume  that  both  gold  and 
silver  are  to  continue  to  be  extensively  .used  in  the  whole 
aggregate  of  civilised  communities  effectively  united  by  inter- 
national trade : and  at  the  present  time  the  most  eager  mono- 
metallists do  not  appear  to  desire  the  universal  adoption  of  a 
gold  currency,  at  the  risk  of  a great  rise  in  the  value  of  the 
medium  of  exchange.  Indeed  we  may  say  that  the  trade  of 
the  world — even  the  internal  trade  of  the  British  Empire — 
will  in  any  case  be  carried  on  under  what  may  be  called,  in  a 
certain  sense,  “ bi-metallic  ” conditions : and  that  the  practical 
issue,  so  far  as  international  trade  is  concerned,  lies  not  between 
mono-metallism  and  bi-metallism,  strictly  speaking,  but  between 
what  we  might  call  “ rated  ” and  “ unrated  bi-metallism.” 

If,  then,  the  advantages  of  effectual  bi-metallism  be  granted, 
the  next  point  in  a practical  consideration  of  the  scheme  would 
be  to  estimate  carefully  the  actual  chance  of  maintaining  it. 
But  to  frame  such  an  estimate  hardly  comes  within  the  scope  of 
the  present  treatise : since  for  this  purpose,  as  we  have  seen,  it 
is  fundamentally  important  to  determine  the  extent  and  dura- 
bility of  the  combination  of  governments  which  can  reasonably 
be  anticipated,  as  well  as  the  extent  of  the  monetary  demand 
that  they  can  control,  as  compared  with  the  outside  demand  for 
the  precious  metals.  I do  not  profess  to  deal  with  the  strictly 
political  aspect  of  this  question,  and,  in  a treatise  that  is  primarily 
concerned  with  principles,  it  would  be  out  of  place  to  discuss  fully 
even  its  economic  aspect : especially  as  the  industrial  world  of 
which  England  is  a part  seems  to  me  to  have  before  it  a difficult 
choice  between  different  kinds  of  risk  and  inconveniences,  the 

1 The  two  advantages  mentioned  in  the  text  are  those  which  appear  to 
belong  to  the  bi-metaUic  system  independently  of  any  forecast  of  the  special 
conditions  of  production  of  the  two  metals.  But  in  view  of  the  unfavourable 
prospects  of  the  future  production  of  gold — mentioned  in  the  next  paragraph — 
some  bi-metallists  would  lay  still  greater  stress  on  the  danger  which  a gold 
mono-metallic  currency  involves  of  a fall  in  prices  so  great  and  prolonged  as  to  be 
seriously  injurious  to  trade  and  industry. 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE  453 


decision  of  which  requires  a very  careful  estimate  of  the  economic 
quantities  involved.  I may,  however,  say  that  at  present  the 
balance  of  argument  appears  to  me  to  be  on  the  side  of  bi- 
metallism ; provided  that  a stable  combination  can  be  effected 
— such  as  has  been  proposed — of  England,  the  United  States, 
Germany,  and  the  countries  forming  the  Latin  Union.  It  must, 
indeed,  be  conceded  to  mono-metallists  that  if — as  Soetbeer 
holds* — the  present  consumption  of  gold  in  arts  and  manufactures 
absorbs  nearly  three-fifths  of  the  annual  supply,  then,  considering 
the  general  reasons  that  we  have  for  expecting  the  production 
of  gold  to  grow  hereafter  more  scanty  and  costly  as  compared 
•with  that  of  silver,  any  possible  bi-metallic  union  has  to  face  a 
serious  risk  of  its  currency  coming  to  consist  mainly  of  silver. 
On  the  other  hand,  the  same  causes  that  would  bring  about  this 
result  would,  if  there  were  no  bi-metallic  union,  inflict  on  the 
industry  of  the  countries  with  a gold  standard  the  serious  evils 
of  a great  rise  in  the  purchasing  power  of  the  medium  of 
exchange : and,  though  our  ideal  aim  should  be  simply  to 
keep  the  value  of  this  medium  stable,  it  must  be  recognised 
that  the  economic  evils  of  a rise  in  value  are  considerably 
greater  than  those  of  a fall  in  value ; since  the  latter  change  is 
on  the  whole  favourable  to  the  classes  that  are  economically 
most  important.  Further,  I think  that  the  “ misery  ” of  having 
to  use  silver  instead  of  gold  is  somewhat  exaggerated  by  English 
mono-metallists,  especially  when  only  an  easily  altered  law 
prevents  an  Englishman  Irom  having  the  one-pound  notes  on 
which  his  Scotch  fellow-countrymen  seem  to  thrive.  Nor  is 
the  extra  cost  of  storing  silver  bank-reserves,  and  of  transmitting 
silver  bullion  in  pa3rment  of  international  debts,  an  evil  of  such 
magnitude  that  the  mere  risk  of  it  should  be  held  to  be  a con- 
clusive objection  to  bi-metallism. 

§ 7.  But,  as  I have  before  said,  it  is  possible  to  obviate  the 
bad  effects  of  great  changes  in  the  purchasing  power  of  the 
medium  of  exchange,  by  a method  altogether  different  from 
bi-metallism  and  from  all  other  schemes  that  aim  at  actually 

* See  his  “Materialien  zur  Erlauterung  und  Beurtheilung  der  wirthschaft- 
“lichen  Edelmetallverhaltnisse’’  (1885).  He  estimates  the  gold  product  in  the 
years  1881 — 1884  at  589,000  kilograms,  and  the  amount  consumed  in  arts  and 
manufactures — deducting  old  materials — during  the  same  years  at  350,000 
kilograms. 


454 


POLITICAL  ECONOMY 


BOOK  in 


modifying  the  exchange-value  of  standard  coin.  We  may  allow 
the  actual  standard  to  fluctuate,  and  yet  maintain  a stable 
ideal  standard  by  measuring  and  allowing  for  these  fluctuations. 
The  adoption  of  such  a “ tabular  standard  ” is  suggested 
by  Jevons  in  his  little  hook  on  “Money”'  (c.  xxv).  He 
suggests  that  a permanent  government  commission  might  be 
“created,  and  endowed  with  a kind  of  judicial  power.  The 
“ officers  of  the  department  would  collect  the  current  prices  of 
“ commodities  in  all  the  principal  markets  of  the  kingdom,  and, 
“ by  a well-defined  system  of  calculations,  would  compute  from 
“ these  data  the  average  variations  in  the  purchasing  power  of 
“gold.  The  decisions  of  this  commission  would  be  published 
“ monthly,  and  payments  would  be  adjusted  in  accordance  with 
“ them.  Thus,  suppose  that  a debt  of  one  hundred  pounds  was 
“incurred  upon  the  1st  of  July,  1875,  and  was  to  be  paid  back  on 
“the  1st  July,  1878;  if  the  commission  had  decided  in  June,  1878, 
“that  the  value  of  gold  had  fallen  in  the  ratio  of  106  to  100  in 
“the  intervening  years,  then  the  creditor  would  claim  an  increase 
“of  6 per  cent,  in  the  nominal  amount  of  the  debt. 

“At  first  the  use  of  this  national  tabular  standard  might  be 
“permissive,  so  that  it  could  be  enforced  only  where  the  parties 
“to  the  contract  had  inserted  a clause  to  that  effect  in  their  con- 
“ tract.  After  the  practicability  and  utility  of  the  plan  had  be- 
“come  sufficiently  demonstrated,  it  might  be  made  compulsor}',  in 
“the  sense  that  every  money  debt  of,  say,  more  than  three  months’ 
“standing,  would  be  varied  according  to  the  tabular  standard,  in 
“the  absence  of  an  express  provision  to  the  contrar}'.”  It  is  not 
intended  that  such  a commission  should  take  the  prices  of  all 
commodities  into  account  in  their  computation:  but  merely  that 
they  should  take  a considerable  number  of  different  commodities, 
chosen  so  as  to  be  fairly  representative  of  the  whole  mass. 

I concur  with  Jevons  in  regarding  the  scheme  as  theoretically 
sound,  though  I think  that  a considerable  time  would  have  to 
elapse  before  so  unfamiliar  a basis  for  pecuniary  contracts  would 
be  likely  to  be  voluntarily  adopted  to  a sufficient  extent  to  justil}' 
its  formal  establishment  by  government  as  the  normal  basis,  any 
deviation  from  which  must  be  exjjressly  announced.  I think  also 

^ As  Jevons  is  careful  to  explain,  the  suggestion  of  such  a “tabular  standard” 
as  he  advocates  was  first  made  by  Joseph  Lowe  in  1822 ; and  afterwards  by 
G.  Poulett  Scrope  in  1833. 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE 


455 


that  the  inevitable  theoretical  imperfections  of  the  process  by 
which  variations  in  the  material  standard  would  be  measured 
would  render  it  especially  necessary  to  proceed  with  great  caution 
in  its  practical  application.  As  I have  elsewhere'  argued,  it  is 
impossible  to  determine  with  perfect  precision  the  extent  to 
which  the  general  purchasing  power  of  gold — or  any  other  com- 
modity— has  changed  within  a given  period ; in  consequence  of 
(1)  the  changes  that  take  place  in  the  relative  quantities  in 
which  different  articles  enter  into  ordinary  consumption,  and  (2) 
of  the  changes  in  quality  of  articles  nominally  the  same,  caused 
by  the  development  of  industry.  I agree  with  Jevons  that 
the  inevitable  element  of  inexactness  thus  introduced  into  the 
scientific  computation  of  a tabular  standard  of  value  would  not 
practically  prevent  us  from  securing  by  such  a standard  a higher 
degree  of  stability  in  the  value  of  money-debts  than  could  other- 
wise be  obtained.  But  it  would  have  the  effect  of  making  any 
plan  adopted  by  such  a commission  as  he  proposes  appear  some- 
what arbitrary:  and  in  carrying  it  out  very  delicate  points  would 
arise  on  which  the  decisions  of  the  commission — when  they  came 
to  involve  large  pecuniary  interests — would  be  severely  criticised. 
For  example,  if  any  important  change  in  consumption  rendered 
it  necessary  to  reduce  the  importance  of  any  commodity  in  the 
selected  list,  or  even  to  substitute  a new  commodity,  or  if  a 
question  arose  as  to  the  right  quality  to  be  chosen  in  the  case  of 
an  article  of  which  there  were  different  and  varying  qualities, — 
the  immense  power  of  determining  gain  or  loss  that  the  scheme 
would  place  in  the  hands  of  a few  persons  would,  I fear,  arouse 
much  jealousy  and  distrust.  I do  not  urge  these  objections  as 
reasons  for  not  carrying  Jevons’s  suggestion  into  effect : I should 
be  glad  to  see  this  done : but  I do  not  think  that  we  can 
reasonably  regard  it  as  a resource  for  dealing  with  present 
evils  or  risks,  arising  from  changes  in  the  purchasing  power 
of  gold-. 

' Book  I.  c.  ii.  g 3,  pp.  71  to  73. 

2 Before  leaving  this  subject,  I ought  to  notice  a combination  of  the  method 
of  bi-metallism  with  the  method  of  the  tabular  standard,  proposed  by  M.  Leon 
Walras,  which  is  certainly  at  once  simple  and  ingenious,  though  I cannot  regard 
it  as  practicable.  M.  Walras  proposes  that  there  should  be  a union  of  govern- 
ments, similar  to  that  contemplated  by  bi-metallists,  which  should  have  for  its 
object  not  to  maintain  the  unlimited  coinage  of  gold  and  silver  at  a fixed  ratio, 
but,  while  coining  gold  freely  in  unlimited  amounts,  to  circulate  along  with  it 


456 


POLITICAL  ECONOMY 


BOOK  m 


§ 8.  Paper  Gufrency  and  Banking.  The  governmental 
monopoly  of  metallic  currency  has  never,  so  far  as  I know,  been 
advocated  by  theorists-  -though  in  earlier  ages  it  has  been 
extensively  used — as  a source  of  public  revenue : in  fact,  as  we 
have  seen,  the  practical  question  is  rather  whether  it  should  be 
a source  of  expense  to  the  nation.  It  is  universally  admitted 
that  the  alarm  and  disturbance  to  trade  that  would  be  caused, 
if  government  tried  to  gain  by  reducing  the  amount  of  metal  in 
coins  while  keeping  up  their  value  by  limitation  of  issue,  would 
far  more  than  outweigh  any  profit  that  might  be  made  by  the 
operation.  It  is  agreed,  therefore,  that  government  ought  to 
coin  metal  into  standard  coins  freely  for  all  applicants,  at  a 
price  at  any  rate  not  materially  greater  than  the  cost  of  coining. 
For  similar  reasons,  it  is  agreed  that  the  tempting  source  of 
gain  offered  by  the  power  of  issuing  inconvertible  notes  should 
be  at  any  rate  reserved  for  an  extreme  crisis  of  national  need. 
But  it  has  often  been  maintained  that  the  State  ought  to  keep 
in  its  own  hands  the  business  of  issuing  notes  convertible  into 
coin  on  demand,  with  the  view  of  deriving  from  it  a valuable 
contribution  to  the  national  income.  And  it  is  certainly  true 

such  an  amount  of  silver  coin  as  should  be  found  to  be  from  time  to  time 
necessary  to  keep  the  purchasing  power  of  money  approximately  stable.  This 
silver  coin  he  calls  “billon  regulateur,”  intending  it  to  have— like  ordinary 
token  coin — a value  fixed  in  relation  to  the  gold  coin,  and  higher  than  that  of 
the  silver  contained  in  it.  The  amount  of  such  coin  should  be  determined  from 
time  to  time  by  an  international  statistical  commission,  which  should  have  the 
function  of  ascertaining  at  certain  intervals  the  extent  to  which  general  prices 
had  risen  or  fallen:  and  its  coinage  should  be  apportioned  by  agreement  among 
the  combining  nations,  according  to  the  recommendations  of  this  commission. 
Supposing  such  an  agreement  could  be  brought  about  and  maintained,  I think 
this  system  might  prove  as  strong  as  the  bi-metallic  system  proper  to  resist 
the  disturbing  force  likely  to  be  exercised  on  it  by  the  expected  scanty  supply  of 
gold;  while,  so  long  as  this  result  was  brought  about,  this  regulated  supplement 
of  silver  might  no  doubt  have  an  important  effect  in  preventing  or  reducing 
fluctuations  in  the  general  purchasing  power  of  money.  But  the  problem  of 
determining  the  varying  amounts  of  silver  coin  necessary  to  prevent  these 
fluctuations  appears  to  me  much  more  difficult  and  complex  than  it  does  to 
M.  Walras  ; since  the  effect  on  prices  of  a given  addition  to  the  amount  of  metal 
used  for  monetary  purposes  would  vary  very  much  according  to  the  nature  and 
efficiency  of  the  banking  system  in  different  countries.  And,  since  any  serious 
mistake  in  the  apportionment  of  silver  coinage  among  the  combining  countries 
would  render  the  country  on  which  an  excess  of  silver  was  imposed  liable  to  a 
drain  of  gold,  I think  that  the  difficulties  of  forming  and  maintaining  such  an 
international  agreement  as  M.  Walras’  scheme  requires  would  be  quite  in- 
superable— at  least  for  a long  time  to  come. 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE 


457 


that  by  monopolising  this  part  of  the  business  of  banking  a 
government  can  practically  borrow  a considerable  amount  of 
capital  at  9.  very  low  rate ; i.e.,  at  the  cost  of  making  and 
circulating  “^he  notes,  together  with  ordinary  inteiest  on  the 
metal  kept  as  a reserve  in  order  to  secure  convertibility.  This, 
however,  does  not  prove  that  it  is  the  interest  of  the  community 
that  such  a monopoly  should  be  exercised:  there  are  many 
highly  objectionable  governmental  monopolies  which  the  State 
could  easily  carry  on  with  considerable  profit  to  the  exchequer. 
What  has  to  be  shewn  is  either  (1)  that  governmental  manage- 
ment has  some  special  advantages  as  compared  with  individual 
or  associative  management  in  this  business : or  at  least  (2) 
that,  for  some  reason  or  other,  the  extra  gain  that  bankers 
would  make,  if  free  issue  of  bank-notes  were  allowed,  would  not 
be  transferred  to  the  consumers  by  a more  abundant  and  cheap 
supply  of  the  conveniences  of  banking.  As  regards  (2)  it  is,  as 
we  have  seen,  theoretically  possible  that  this  transfer  might  not 
take  place : the  extra  gains  might  (a)  be  retained  by  the  banks 
so  far  as  circumstances  exempt  them  from  competition,  or  (b) 
might  be  divided  among  an  excessive  number  of  competing 
businesses,  so  as  to  reduce  average  profits  but  not  charges.  I do 
not,  however,  know  any  adequate  gi'ounds  for  supposing  that 
these  effects  would  occur ; or  that  competition  would  not  operate 
in  the  normal  way. 

As  regards  point  (1),  it  certainly  seems  that  the  business 
of  issuing  notes  and  giving  coin  for  them  on  demand  is  of 
the  routine  character  suited  to  governmental  management ; as 
admitting  of  being  conducted  safely  under  fixed  rules,  by  which 
(e.g.)  the  amount  of  reserve  to  be  kept  is  once  for  all  deter- 
mined^: and  a solvent  government  seems  to  have  an  impor- 
tant advantage — as  compared  with  private  enterprise  pure  and 
simple — in  being  able  to  provide  more  complete  security  at  a 
smaller  expense  of  reserve:  partly  from  the  generally  greater 
stability  of  governments,  partly  because  a government,  in 
the  last  resort,  can  suspend  payment  and  yet  keep  its  notes 
current.  And  this  completer  security  is  important  not  only 
because  the  greater  confidence  that  a safe  currency  inspires  is 

1 I do  not  mean  to  affirm  that  this  is  the  most  economical  mode  of  con- 
ducting the  business  of  issuing  notes.  As  I shall  presently  explain,  there  are 
strong  reasons  for  holding  that  a more  elastic  system  would  be  more  economical. 


458 


POLITICAL  ECONOMY 


BOOK  III 


likely  to  increase  its  general  use ; but  especially  for  the 
protection  of  the  poor  and  ignorant  persons  who  would  be 
unable  to  inquire  into  the  circumstances  of  the  different  banks 
whose  notes  they  accept. 

These  reasons  appear  to  me  to  weigh  heavily  against  an 
absolutely  unregulated  issue : it  seems,  however,  that  adequate 
security  might  be  provided  for  the  ordinary  note-holder*  by- 
merely  placing  private  issues  under  strict  governmental  regula- 
tion, while  still  leaving  to  private  enterprise  the  determination 
of  the  amount  of  notes  and  the  proportion  of  reserve  required 
from  time  to  time.  Thus — to  adopt  a suggestion  made  by  Mr 
R.  H.  Patterson‘S — bank-notes  might  be  issued  hy  government, 
but  for  any  bank  requii’ing  them,  without  limit,  subject  only 
to  the  condition  that  their  value  should  be  covered  by  a 
deposit  of  government  securities  exceeding  the  nominal  value 
of  the  notes  by  an  amount  sufficient  to  obviate  any  danger 
of  loss  from  depreciation  of  the  securities.  The  bank  for 
which  such  notes  were  issued  should  be  solely  responsible 
for  the  payment  of  gold  for  the  notes;  but  they  should  be 
legal  tender  until  the  bank  stopped  payment.  Whenever  a 
bank  stopped  payment,  its  deposited  securities  would  be  at 
the  disposal  of  the  government  for  the  payment'  of  the  note- 
holders ; the  notes,  in  fact,  would  become  practically  a kind  of 
exchequer  bills ; and  they  would  probably  continue  to  circulate 
in  this  condition.  But,  even  if  they  did  not  circulate,  the 
ordinary  note-holder  would  at  any  rate  suffer  no  serious  loss 
from  the  collapse  of  the  bank  responsible  for  them. 

Supposing  the  value  of  any  note  to  be  secured,  either  in 
this  wa}'  or  by  full  governmental  responsibility,  there  would 
seem  to  be  no  ground  for  prohibiting  the  issue  of  notes  below 
a certain  amount ; unless  such  issue  should  be  found  to  carry 
with  it  inevitably  a material  increase  of  forgery,  which  the  ex- 
perience of  Scotland  does  not  lead  me  to  anticipate.  Apart 
from  this  latter  danger,  the  issue  of  small  notes  is,  of  coume, 
an  economic  advantage  to  the  bankem  directly,  and  indirectly — 
we  may  assume — to  their  customers ; no  less  than  the  issue  of 
notes  for  larger  amounts  is. 

* I distinguish  the  “ordinary  note-holder”  from  the  man  of  business  who  is 
chiefly  liable  to  suffer  from  a financial  crisis. 

2 Cf.  Science  of  Finance,  c.  xx. 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE 


459 


But  although  it  seems  manifestly  possible,  by  such  a regula- 
tion as  that  above  suggested,  to  protect  the  ordinary  note-holder 
from  material  loss,  I hardly  think  that  this — or  any  other 
scheme  for  mere  regulation  of  issues,  as  contrasted  with  absolute 
limitation  through  State  monopoly — would  adequately  secure 
the  result  for  which  the  commercial  world  is  most  keenly  con- 
cerned, by  providing  a supply  of  good  money  in  a financial  crisis 
to  fill  the  gap  caused  by  a general  collapse  of  credit.  It  may  be 
urged  that,  as  things  are,  the  agony  point  of  such  a crisis  in 
London  is  reached  by  the  Bank  of  England  declining  to  lend 
even  on  government  securities,  and  that  the  dread  of  this  point 
has  a certain  tendency  to  realise  itself,  as  it  intensifies  the 
earlier  stages  of  the  crisis : and  it  may  be  thought  that  such  a 
scheme  as  the  above  would  remove  this  dread,  as  it  would 
enable  any  bank  to  obtain  legal  tender  by  depositing  its  own 
government  securities.  And  I should  admit  it  to  be  quite 
possible  that  the  pressure  of  a crisis  might  in  this  way  receive 
timely  relaxation,  so  that  the  crisis  might  pass  off  without 
reaching  the  worst  stage;  but  I do  not  see  how  we  can  be 
assured  that  this  would  happen ; while  if  the  worst  stage  were 
reached,  if  the  crisis  became  panic,  the  weak  side  of  the  pro- 
posed system  of  legal  tender  notes  would  become  manifest. 
Everyone  would  fear  that  the  particular  bank  responsible  for 
his  notes  might  stop  payment,  and  thereby  reduce  his  notes  to 
the  condition  of  mere  government  debts,  not  immediately  and 
certainly  available  for  meeting  liabilities ; there  would,  therefore, 
be  a serious  danger  of  a general  run  for  gold,  and  general  ruin. 
This  danger  is  avoided  under  the  existing  system  in  England ; 
since  no  one  is  afraid  of  the  insolvency  of  the  issue  department 
of  the  Bank  of  England,  even  when  the  limitations  on  issue 
in  the  Bank  Charter  Act  of  1844  are  temporarily  suspended — 
as  has  been  the  case  in  the  three  chief  crises  that  have 
occuiTed  since  1844L  And  it  appears  to  me  that  only  notes 
issued  by  government,  or  by  a bank  understood  to  be  prac- 
tically secure  of  the  support  of  government  in  the  ultimate 
resort,  would  have  the  unique  quality  required  to  resist  the 
worst  storms  of  distrust  that  experience  shews  to  be  possible. 

§ 9.  There  seem  to  me,  therefore,  to  be  strong  general 

* The  is.siue  department  is  required  by  the  Act  to  keep  gold  corresponding  to 
all  the  notes  circulated,  beyond  a certain  minimum. 


460 


POLITICAL  ECONOMY 


BOOK  in 


reasons  for  keeping  the  function  of  issuing  notes — and  of  pro- 
viding a reserve  of  gold  for  their  conversion — under  the  respon- 
sibility of  government ; instead  of  merely  regulating  the  issue 
on  some  such  plan  as  that  above  proposed.  If,  however,  we 
yield  to  these  reasons  and  assume  that  it  is  desirable  to  have  a 
monopolised  issue  of  notes,  sustained  (in  the  last  resort)  by  the 
credit  and  authority  of  government,  in  order  to  guard  against  the 
extreme  perils  of  a panic,  it  is  manifest  that  a step  in  govern- 
mental interference,  beyond  what  we  have  so  far  expressly  con- 
sidered, will  become  necessary.  For  in  order  that  this  end  may  be 
attained,  in  order  that  the  abnormal  issues  of  notes  required  in 
a panic  may  be  properly  managed,  the  government  must  under- 
take— directly  or  indirectly — not  merely  the  function  of  buying 
gold  with  notes  and  redeeming  notes  with  gold  but  also  the 
function  of  lending  notes  on  adequate  security.  Thus  the  depart- 
ment that  issues  notes  must  either  (1)  become  a regular  bank, 
or  (2)  be  prepared  to  perform  from  time  to  time,  in  specially 
difficult  circumstances,  the  most  delicate  and  important  part  of 
the  work  of  a bank,  or  (3)  it  must  constitute,  or  enter  into 
alliance  with,  some  individual  bank  doing  ordinary  banking 
business,  and  entrust  these  duties  to  its  management.  The 
third  of  these  courses  seems  the  best ; since,  in  the  first  place, 
the  business  of  lending  money  on  credit  does  not  seem  to  be 
generally  more  suitable  to  governmental  management  than  any 
other  branch  of  commerce ; rather  it  would  seem  to  require  the 
close  and  keen  observation  of  the  state  of  trade  generally,  and 
of  individual  traders,  which  it  is  the  special  advantage  of  private 
enterprise  to  call  forth.  And,  secondly,  a department  that  had 
no  regular  banking  business  at  ordinary  times  would  hardly  be 
likely  to  have  the  knowledge  and  trained  skill  required  for 
solving  correctly  difficult  problems  of  banking  at  special  crises ; 
it  would  have  to  depend  on  the  advice  of  outsiders,  liable  to  be 
biassed  by  urgent  private  interests.  But  even  the  establishment 
of  a bank  in  special  connexion  with — though  not  a department 
of — government  tends  to  produce  veri"  important  incidental 
effects  on  the  banking  system  of  the  country.  The  unique 
security  that  such  a governmental  bank  affords  to  depositors 
gives  other  banks  an  inducement  to  use  it  for  the  custod}'  of 
their  reserves;  money  lodged  \vith  the  governmental  bank  is 
thought  as  safe  as  money  in  a strong  box,  and  less  troublesome; 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE  461 


transfers  of  sums  in  its  books  are  a very  convenient  mode  of 
settling  accounts  among  banks;  and  thus  bankers  slide  naturally 
into  the  “ one-reserve  system  ” that  actually  exists  in  England. 
It  must  be  admitted,  I think,  that  this  system,  increasing  as  it 
does  the  instability  of  the  vast  edifice  of  credit  that  is  supported 
on  a small  basis  of  gold,  renders  the  danger  of  crisis  and 
panic  proportionally  greater;  that  is,  the  very  need,  of  which 
the  existence  (as  we  have  seen)  forms  the  main  justification  for 
governmental  interference  with  banking,  must  be  partly  at- 
tributed to  that  interference  itself.  On  the  other  hand,  the 
same  interference  must  to  an  equal  extent  be  credited  with  the 
merit  of  the  system,  which  lies  in  its  economy:  it  enables  a 
vast  banking  business  to  be  transacted  at  a small  expenditure 
in  metallic  reserve;  and,  therefore,  those  critics  of  our  Bank  Act 
of  1844,  who  complain  of  the  large  amount  of  gold  lying  idle  in 
the  vaults  of  the  Bank  of  England,  ought  at  any  rate  to  recog- 
nise that  the  aggregate  expense  incurred  by  the  community  in 
keeping  gold  is  less  than  it  would  probably  be  with  a system 
of  6*06  banking,  under  which  the  leading  banks  (at  any  rate) 
would  be  likely  to  keep  each  its  own  reserve. 

This  does  not  of  course  prove  that  the  metallic  reserve 
actually  kept  under  the  English  system  might  not  be  safely 
reduced ; or  that  it  might  not  be  turned  to  better  account,  if 
the  connexion  between  the  government  and  what  we  have 
called  the  “governmental  bank”  were  established  on  a different 
plan.  Indeed  it  seems  evident  that  if  the  Bank  of  England 
had  full  discretion  in  determining  the  proportion  of  reserve  to 
notes  issued,  it  would  at  least  have  the  power  of  performing  its 
functions  in  a manner  more  advantageous  to  the  community 
than  at  present.  To  shew  this  we  will  suppose  that  the  Bank  is 
now  keeping  practically^  about  eleven  millions  of  metallic  reserve 
to  meet  the  liabilities  of  the  banking  department,  and  about  ten 
millions  more  to  meet  those  of  the  issue  department.  Under 
the  present  strict  regulation  of  the  issue  department  this  latter 
reserve  cannot  be  used  for  banking  purposes,  so  that  its 
existence  does  not  give  any  additional  strength  to  the  banking 
department ; hence  any  given  drain  of  gold  acts  on  the  banking 

^ Of  course  the  reserve  in  the  banking  department  actually  consists  mainly 
of  notes  ; but  the  result  is  practically  that  stated  in  the  text,  since  gold  corre- 
sponding to  these  notes  is  kept  in  the  issue  department. 


462 


POLITICAL  ECONOMY 


BOOK  in 


reserve  with  much  greater  force  than  it  would  ordinarily  exercise 
if  the  Bank  were  left  free  to  treat  the  two  reserves  as  one. 
Hence  it  would  seem  that  if  the  Bank  were  unfettered,  the  rate 
of  discount  would  ceteris  paribus  be  decidedly  less  liable  to  be 
affected  by  slight  and  transient  movements  of  gold  than  is  now 
the  case ; so  that  the  rapid  and  large  fluctuations  in  interest, 
which  are  recognised  as  a bad  result  of  our  existing  system, 
would  be  reduced,  other  things  being  the  same.  On  the  other 
hand,  it  is  bold  to  assume  that  other  things  would  remain 
the  same:  or  rather — for  the  present  reserve  may  be  too 
large — that  the  Bank  would  take  all  due  precautions  to  avoid 
the  risk  of  having  to  suspend  payments.  Indeed,  when  we 
consider  merely  from  an  abstract  point  of  view  the  proposal  to 
give  a particular  joint-stock  company  an  exclusive  privilege  of 
issuing  notes  the  value  of  which  will,  in  the  last  resort,  be  sus- 
tained by  the  authority  of  government,  without  subjecting  its 
exercise  of  this  privilege  to  any  governmental  control  whatsoever, 
it  certainly  appears  a very  hazardous  measure.  If  we  suppose 
the  Bank  to  be  governed  by  the  vulgar  desire  of  private  gain,  it 
will,  in  determining  the  proportion  of  notes  to  reserve,  consider 
the  risk  to  itself  and  not  the  risk  to  the  community ; and  though 
the  danger  to  itself  from  an  inadequate  reserve  would  be  serious, 
it  would  be  less  than  in  the  case  of  an  ordinary  bank — since  we 
have  supposed  that  government  would,  in  the  last  resort,  inter- 
vene to  sustain  the  currency  of  the  notes. 

It  remains  to  consider  briefly  whether,  supposing  that  there 
is  a legally  determined  normal  limit  of  the  uncovered  note- 
issue,  it  is  desirable  that  the  relaxation  of  this  restriction  should 
be  only  obtainable — as  in  England — by  irregular  governmental 
interference,  or  that  it  shall  be  regularly  purchasable  by  the 
Bank.  If  the  price  of  the  relaxation  were  placed  sufficiently 
high,  if  {e.g.)  the  Bank  had  to  pay  5 per  cent,  for  any  excess  over 
the  normal  amount  of  uncovered  note-issue,  the  difference  between 
the  two  plans  would  seem  to  be  chiefly  political  rather  than 
economical : neither  resource  would  be  brought  into  play  except 
in  an  extreme  emergency,  but  the  latter  would  have  the 
advantage  of  avoiding  the  bad  constitutional  precedent  set  by 
an  irregular  suspension  of  a law.  The  latter  measure  would, 
however,  work  very  differently,  if  the  price  paid  were  so  small 
that  the  extra  issue  could  be  counted  on  as  an  ordinary  mode 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE  4(j3 

of  relieving  the  pressure  on  the  money-market ; such  a regula- 
tion would,  I think,  be  an  awkward  combination  of  control  and 
freedom : just  when  the  Bank’s  relations  with  the  commercial 
world  became  most  difficult  and  delicate,  the  responsibility  for 
yielding  to  the  pressure  for  loans  would  be  partly  taken  off  its 
shoulders  by  what  would  appear  to  be  express  governmental 
provision  for  extended  issue. 

I have  said  that  that  part  of  an  ordinary  banker’s  function 
which  consists  in  lending  money  to  traders  and  other  employers 
of  capital  is  not  a business  in  which  governmental  management 
is  likely  to  have  any  special  advantage.  On  the  other  hand,  as 
a borrower  of  money  the  government  of  a well-ordered  and 
prosperous  community  is  able  to  give  a higher  degree  of  security 
to  its  creditors  than  even  a large  joint-stock  company  can  do. 
Hence  governmental  agency  is  specially  adapted  for  taking 
charge  of  the  savings  of  persons,  to  whom  security  is  generally 
of  more  importance  than  high  interest,  whether  such  savings 
take  the  simple  form  of  depositing  money,  or  the  more  compli- 
cated form  of  payment  for  life-insurance,  purchase  of  annuities, 
&c.  Moreover  there  are  particular  departments  of  the  business 
of  lending,  where  the  risk  may  be  reduced  to  a small  amount, 
which  appear,  from  their  routine  character,  to  be  not  ill-suited 
to  governmental  management.  Thus  there  seems  to  be  no  par- 
ticular reason  why  government  should  not  lend  money  on  the 
security  of  land,  as  I shall  presently  notice;  or  even,  for  short 
periods,  on  moveable  pledges,  provided  they  are  of  a kind  such 
that  their  value  can  without  difficulty  be  approximately  ascer- 
tained and  is  not  likely  to  change  materially  in  a short  time : 
and  in  fact  experience*  renders  it  probable  that,  by  establishing 
a governmental  monopoly  of  pawnbroking,  loans  can  be  re- 
muneratively made  to  the  poor  on  easier  terms  than  open 
competition  would  enable  them  to  secure.  There  is  the  further 
argument  for  such  a governmental  monopoly  that  it  consider- 
ably decreases  the  difficulty  of  preventing  pawnbrokers  from 
becoming  practically  receivers  of  stolen  goods  I 

§ 10.  I pass  to  notice  certain  important  cases  in  which  the 


* See  statistics  given  in  an  article  on  Pawnbroking  at  Home  and  Abroad,  by 
the  Rev.  W.  Edwards,  in  the  Nineteenth  Century,  June,  1881 — observing,  how- 
ever, that  the  Monts-de-Pi6te  in  France  are  only  partially  self-supporting. 

* The  distributional  arguments  for  these  measures  will  be  noticed  in  c.  vii. 


464 


POLITICAL  ECONOMY 


BOOK  m 


interference  of  government  has  been  widely  exercised  and  still 
more  extensively  solicited  partly  in  the  interest  of  production ; 
but  also  largely  with  a view  to  other  ends — the  relief  of  distress, 
the  increase  of  political  security  and  stabihty,  the  amelioration 
of  the  moral  or  intellectual  condition  of  large  classes  of  citizens, 
or  the  attainment  of  certain  ideal  aims  of  social  human  progress. 
The  departments  to  which  I refer  may  be  briefly  indicated  by 
the  names  Edixcation,  Emigration,  and  Land-tenure;  the  last 
two  being  to  some  extent  connected.  I shall  here  consider  them 
merely  from  a productional  point  of  view. 

Of  these  departments  the  first  is  undoubtedly  the  most 
important,  if  we  take  the  term  in  an  extended  sense,  to  include 
all  institutions  or  regulations  for  the  promotion  of  culture, 
either  of  adults  or  of  children.  I have  before  observed,  that — 
though  the  same  machinery  may  partly  serve  the  two  pur- 
poses— still  the  principles  on  which  government  intervenes  in 
the  education  of  children  are  importantly  different  from  those 
upon  which  its  assistance  is  claimed  for  the  intellectual  improve- 
ment of  adults.  From  the  fundamental  assumption  of  the 
system  of  natural  liberty,  that  a man  is  the  best  guardian  of  his 
own  interests,  it  by  no  means  follows  that  he  is  the  best  guardian 
of  his  children’s  interests ; and,  in  fact,  in  the  freest  of  modem 
communities,  it  is  found  necessary  to  sustain  by  legal  sanctions 
the  parent’s  obligation  to  provide  even  for  the  material  wants  of 
his  children.  It  is,  therefore,  no  contravention  of  natural  liberty 
— so  far  at  least  as  it  is  maintained  in  the  interest  of  production — 
to  secure  them  a minimum  of  education  by  the  same  legal  com- 
pulsion. But  the  expense  of  this  education,  if  not  artificially 
reduced  by  pecuniary  aid  from  government,  would — in  almost 
any  civilised  society — be  so  serious  a burden  on  the  poorest 
class,  that  it  would  be  practically  impossible  to  make  the  com- 
pulsion universal : and,  as  was  before  pointed  out,  the  community 
derives  an  economic  gain'  from  the  education  of  its  younger 
members — so  far  as  they  are  thereby  rendered  more  efficient 
labourers — which  the  self-interest  of  private  employers  can- 
not be  relied  upon  to  provide,  owing  to  the  difficulty  of 
appropriating  the  advantage  of  the  increased  efficiency.  Hence 

^ It  may  be  observed  that  a certain  portion  of  this  gain  to  the  community 
will  tend  to  appear  as  a definite  national  gain  to  the  national  exchequer,  ir 
consequence  of  the  increased  taxes  paid  by  the  more  productive  'aboursrs. 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE 


465 


a national  provision  for  education  may  to  some  extent  be  con- 
sidered and  justified  as  a measure  for  improving  national 
production.  The  instruction,  ho’vever,  that  is  made  compulsory 
and  artificially  cheap  on  this  principle  should  be  strictly  confined 
to  imparting  aptitudes  of  incontestable  utility  to  industry ; and 
whatever  it  is  made  universally  obligator)"  to  acquire  should,  of 
course,  be  universally  useful. 

But  further : there  may  be  the  same  general  economic  justi- 
fication for  cheapening  by  governmental  aid  the  special  training 
required  for  skilled  labour,  as  there  is  for  cheapening  elementary 
general  education ; that  is,  the  community  may  gain  an  adequate 
return  for  its  expenditure  in  the  greater  abundance  and  better 
quality  of  the  skilled  labour  so  provided.  The  argument  would 
hold,  independently  of  any  assumption  that  natural  liberty  is 
not  likely  to  provide  the  right  kind  of  training  for  those  who 
can  afford  to  pay  for  it.  In  fact,  however,  this  assumption  has 
been  very  generally  made  by  those  who  have  defended  or 
solicited  the  intervention  of  modern  governments  in  the  prepa- 
ration for  various  trades  and  professions.  Even  in  the  case  of 
the  lower  kinds  of  skilled  labour,  it  is  widely  held  that  the 
traditional  custom  of  learning  a trade  by  apprenticeship — 
i.e.,  by  mere  practice  and  the  casual  intermittent  instruction 
that  persons  engaged  in  the  work  can  find  time  to  give  to 
beginners — has  actually  led  to  very  unsatisfactory  results : that 
the  skill  thus  acquired  tends  to  be  mechanical  and  unprogressive, 
and  not  even  so  cheap  as  it  appears,  owing  to  the  long  time 
spent  in  its  acquisition  : and  that,  therefore,  it  is  a socially  remu- 
nei’ative  employment  of  public  money  to  organise  and  artificially 
cheajien  systematic  technical  instructionh  In  the  case,  again, 
of  the  higher  kinds  of  skill  required  for  what  are  called  the 
learned  professions,  the  incapacity  of  ordinary  persons  to  judge 
of  such  skill  has  been  generally  acknowledged  as  a ground  for 
governmental  interference  to  ensure  a certain  degree  of  com- 
petence in  recognised  members  of  these  professions : and  most 
civilised  governments  have  not  been  content  to  secure  this  by 
requiring  certain  examinations  to  be  passed  by  such  persons ; 
they  have  also  given  salaries  to  teachers  appointed  to  impart 
the  necessary  knowledge  at  a low  charge,  in  universities  or  other- 

^ This  view  has  gained  ground  considerably  in  England,  since  the  publication 
— in  1883— of  the  first  edition  of  this  treatise. 


S.  P.  E. 


30 


466 


POLITICAL  ECONOMY 


BOOK  III 


wise.  A modem  university,  however,  is  not  merely  an  institu- 
tion for  imparting  special  kinds  of  knowledge  for  professional 
purposes;  it  has  also  the  function  of  advancing  knowledge 
generally  and  facilitating  its  acquirement  by  students  whose 
aims  are  purely  scientific.  This  speculative  pursuit  of  know- 
ledge is  to  a large  extent — and  to  an  extent  incapable  at  any 
given  time  of  being  definitely  determined — indirectly  useful  to 
industry;  and  since,  as  was  before  noticed,  its  results  cannot 
usually  be  appropriated  and  sold,  there  is  an  obvious  reason  for 
remunerating  the  labour  required  to  produce  these  results,  and 
defraying  the  expenses  incidental  to  the  work,  out  of  public 
funds, — at  any  rate  if  a provision  adequate  for  the  purpose  is 
not  available  from  private  sources. 

Besides  oral  instruction,  in  modem  times,  access  to  books 
is  a most  important  means  of  spreading  and  advancing  know- 
ledge. Libraries,  indeed,  are  among  the  essential  instruments 
of  academic  teaching ; but,  as  has  been  strikingly  said,  a library 
apart  from  oral  instruction  is  itself  a cheap  university.  The 
institution  of  free  libraries  and  museums  supported  at  public 
expense  is  perhaps  most  frequently  advocated,  just  as  a national 
provision  for  elementary  or  higher  education  is,  from  a distribu- 
tional point  of  view,  as  a harmless  and  salutary  form  of  com- 
munism ; still  the  great  indirect  advantage  that  the  community 
gains  through  the  general  spread  of  intelligence,  and  especially 
through  facilitating  the  acquirement  of  knowledge  by  exception- 
ally gifted  persons,  is  at  any  rate  an  important  consideration 
from  the  point  of  view  of  production.  And  even  in  the  case  of 
galleries  and  museums  of  Art  this  consideration  comes  in  to 
some  extent,  so  far  as  artistic  cultivation  improves  artistic 
production. 

Before  leaving  this  subject  it  should  be  observed  that  by  far 
the  most  extensive  application  of  public  funds  to  the  culture  of 
adults,  in  most  modern  European  communities,  consists  of  a pro- 
vision for  religious  worship  and  instruction.  It  would,  however, 
be  obviously  incongruous  to  dwell  on  this  in  the  present  con- 
nexion : and  in  fact  the  interference  of  the  State  for  this  purpose, 
considered  from  a purely  secular  point  of  view,  is  rather  to  be 
justified  on  account  of  the  value  of  the  clergy  as  “ spiritual 
“ police  ”, — that  is,  from  the  indirect  aid  given  by  them  to  the 
necessary  governmental  function  of  preventing  crime. 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE 


467 


§ 11.  I pass  to  consider  the  interference  of  government 
in  order  to  promote  or  regulate  the  migration  of  human  beings 
from  densely  populated  districts  to  others  that  are  wholly  or 
partially  unoccupied.  Such  interference  has  sometimes  been 
prompted  by  considerations  not  primarily  economic ; thus  the 
colonisation  of  a region  forcibly  annexed,  or  unable  to  resist 
the  intrusion  of  strangers,  has  been  fostered  in  order  to  facilitate 
or  confirm  a conquest  of  territory : on  the  other  hand,  in  some 
countries  the  immigration  of  foreigners  generally,  or  of  persons 
of  alien  race  or  religion,  has  been  prohibited  or  hampered, 
in  order  to  protect  the  native  civilisation  from  the  intrusion  of 
subversive  elements ; elsewhere,  again,  immigration  of  a certain 
kind  has  been  encouraged  in  the  interests  of  morality  and 
social  well-being — as  {e.g.)  when  female  immigration  has  been 
promoted  to  prevent  a great  inequality  of  the  sexes  in  a new 
colony.  The  grounds  and  limits  of  such  kinds  of  interference 
it  is  beyond  my  province  to  discuss : and  the  same  may  be  said 
of  the  measures  now  taken  by  our  government  to  secure  the 
sea-worthiness  of  ships,  and  the  sufficiency  of  their  supply  of 
provisions,  water,  medicine,  &c.;  since  these  latter  regulations 
belong  to  the  class  of  interferences  for  other  than  strictly 
economic  ends,  which  were  briefly  surveyed  in  the  preceding 
chapter.  Confining  ourselves  to  such  governmental  encourage- 
ment or  control  of  emigration  as  has  been  undertaken  or  recom- 
mended on  distinctly  economic  grounds,  we  may  regard  it 
generally  as  a case  closely  parallel  to  that  of  education,  which 
we  have  just  been  considering : the  principle  of  either  kind  of 
interference  is  that  there  is  a possible  gain  to  the  community 
— which  laisser  faire  is  not  likely  to  realise — through  the  in- 
crease of  the  efficiency  of  certairi  labourers,  in  the  one  case 
by  developing  their  personal  aptitudes,  in  the  other  by  placing 
them  in  more  favourable  outward  circumstances.  In  the  case 
of  emigration,  however,  the  distribution  of  this  common  gain 
among  the  various  classes  of  persons  affected  usually  admits 
of  being  somewhat  more  definitely  foreseen  than  in  that  of 
education.  If  the  benefit  consisted  exclusively  in  an  increase 
of  income  to  the  emigrants  themselves,  it  would  hardly,  I con- 
ceive, be  proposed  to  defray  their  expenses  out  of  the  general 
taxes.  But  this  supposition  is  very  unlikely  to  be  realised 
in  practice.  In  the  first  place,  supposing  the  region  of  immi- 

30—2 


468 


POLITICAL  ECONOMY 


BOOK  in 


gration  and  that  of  emigration  to  have  the  same  government, 
the  increased  taxes  subsequently  paid  by  the  immigrants  would 
generally  yield  the  public  a certain  return  on  the  cost  of  con- 
veying them ; against  this,  however,  we  have  to  set  the  in- 
creased expenditure  required  for  the  adequate  fulfilment  of 
the  functions  of  government  towards  the  immigrants  in  their 
changed  circumstances ; and  since  it  is  generally  reasonable  to 
suppose  that  a certain  portion  of  the  assisted  immigrants  would 
have  come  at  their  own  expense  if  they  could  have  got  no  aid 
fi-om  government,  it  would  only  be  in  very  special  circum- 
stances that  the  increment  of  taxes  really  due  to  the  outlay 
of  government  in  assisting  them  would  amount  to  full  interest 
on  the  outlay.  But  generally  speaking,  when  emigration  is 
successful,  measurable  advantages  accrue  from  it,  over  and 
above  this  increment  of  taxation,  to  other  members  of  the 
community  or  to  the  community  as  a whole. 

Here  it  is  important  to  distinguish  (1)  the  advantages 
gained  by  persons  who  employ  the  immigrating  labourers, 
(2)  the  gain  of  those  who  exchange  products  ■with  them,  either 
as  ultimate  consumers  or  for  purposes  of  trade  and  production, 
and  (3)  the  relief  obtained  from  overcrowding.  In  England, 
extensive  schemes  of  governmental  aid  to  emigration  have  often 
been  strongly  supported  with  a view  to  this  last-mentioned 
benefit ; but  there  is  an  ob\dous  danger  that  the  relief  obtained 
by  any  one  such  measure  would  be  merely  temporary,  and,  if 
the  aid  were  continually  renewed,  would  produce  comparatively 
little  remedial  effect,  since  it  would  operate  mainly  as  a partial 
removal  of  the  checks  that  normally  keep  do^vn  population  in 
an  overcrowded  district.  Nor  can  even  teiiiporary  relief  from 
overcrowding  be  thus  secured,  if  free  immigration  is  allowed 
into  the  district  from  which  emigration  is  being  promoted ; 
unless  the  overcrowding  has  forced  the  remuneration  of  labour 
there  to  a level  clearly  below  that  of  all  other  districts  from  which 
immigration  thither  is  possible.  Hence  any  large  supply  of 
governmental  funds  to  emigrants,  considered  merely  as  a relief 
to  the  pressure  of  population  in  the  region  of  emigration,  is  only 
to  be  recommended  as  an  exceptional  eleemosynary  measure,  in 
case  of  unexpected  and  abnormal  distress.  On  the  other  hand, 
during  the  long  sway  of  the  “Colonial  Policy”  that  Adam  Smith 
assailed,  the  chief  advantage  derived  by  the  mother-country 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE 


469 


from  colonisation  was  generally  understood  to  consist  in  the 
extension  of  trade  that  it  brought  about : and  no  doubt  this 
gain,  if  the  colony  flourishes,  is  generally  likely  to  be  in  the 
long  run  considerable';  but  it  can  rarely  be  sufficiently  certain 
and  definite  to  render  it  anything  like  a profitable  outlay  for 
a community  to  send  out  colonists  at  the  public  expense,  for 
the  sake  of  the  profit  of  their  trade  to  the  mother-country. 
There  remains,  as  the  clearest  economic  gain  resulting  from 
emigration  to  others  besides  the  emigrants,  that  which  accrues 
to  the  owners  of  land  and  employers  of  capital  in  the  region 
of  immigration  ; the  resources  of  this  region  being  supposed  to  be 
so  far  undeveloped,  that  considerable  additions  to  the  labour  and 
capital  employed  in  it  may  be  made,  with  an  increasing  rather 
than  diminishing  return  to  both.  At  first  sight  this  would 
seem  to  be  a reason  for  leaving  the  business  of  introducing  emi- 
grants to  the  private  enterprise  of  the  landowners  and  capitalists 
who  might  obtain  a full  return  for  it  in  labour ; but  there  is  a 
serious  obstacle  to  private  enterprise  in  the  uncertainty  of  the 
profit  on  such  outlay  to  any  individual  capitalist,  owing  to  the 
difficulty  of  enforcing  labour-contracts  for  a considerable  term 
of  years— especially  in  a very  thinly  inhabited  country — without 
introducing  something  like  temporary  serfdom.  Hence,  sup- 
posing all  such  serfdom — even  of  criminals  or  men  of  lower 
race — to  be  excluded  on  moral  or  political  grounds,  the  inter- 
vention of  the  public  purse  is  likely  to  be  necessary  for  the 
effective  introduction  of  the  required  labour. 

§ 12.  This  intervention  will  be  facilitated,  if  the  unoccupied 
lands  of  the  region  of  immi^ation  are  owned  by  the  community, 
so  that  the  sale  or  lease  of  them  supplies  a fund  from  which  the 
expense  of  importing  colonists  may  be  defrayed.  And  in  fact 
(as  I before  noticed)  the  question  of  governmental  aid  to 
immigration  has  had  a close  historical  connexion  with  the 
regulation  of  the  acquisition  of  land  in  a new  country.  Here 
the  theoretical  problem  of  determining  the  grounds  and  limits 
of  legitimate  interference  is  complicated  by  a peculiar  diffi- 
culty of  deciding  what  is,  and  what  is  not,  interference ; or, 

' The  extent  of  the  gain,  as  Merivale  points  out,  will  be  very  different  in 
different  cases  ; it  is  conceivable  that  large  numbers  of  emigrants  may  be  settled 
and  comfortably  maintained  in  a colony,  where  the  net  produce  exported  is  yet 
comparatively  insignificant.  Cf.  On  Colonisation,  Lectures  ix.  and  xiii. 


470 


POLITICAL  ECONOMY 


BOOK  III 


to  put  it  otherwise,  what  precise  action  on  the  part  of  the 
government  would  strictly  conform  to  the  principles  of  natural 
liberty.  At  first  sight  it  may  seem  that  in  new  countries,  as 
Merivale^  argues,  “ the  ‘ natural  ’ course  of  settlement  is  that 
“ which  would  take  place,  not  if  land  were  sold  at  the  sum  which 
“ it  will  fetch,  but  if  it  were  granted  away  without  any  purchase 
“at  all.  Free  grant  is  the  natural  system;  deviations  from 
“ it... produce  artificial,  though  perhaps  very  useful,  effects.” 
But  this  view  seems  to  me  to  overlook  the  peculiar  character- 
istics of  property  in  land  which  render  it  impossible  or  mani- 
festly unreasonable  for  government  to  act  on  the  simple 
principle  of  securing  it  to  the  first  occupant.  In  the  first 
place,  how  shall  we  determine  the  extent  of  occupation  ? It 
cannot  be  said  that  a man  is  to  be  understood  to  occupy  what 
he  is  able  to  use,  because  the  “use”  of  land  by  any  individual  may 
vary  almost  indefinitely  in  extent,  diminishing  proportionally 
in  intensity, — e.g.,  it  would  be  absurd  to  let  any  individual  claim 
possession  of  the  whole  ground  over  which  he  could  hunt,  as 
against  another  who  wished  to  use  it  for  pasturage : but  if  so, 
ought  the  shepherd,  again,  to  have  possession  as  against  a would- 
be  cultivator,  or  a cultivator  as  against  a would-be  miner?  Even 
if  we  confine  our  attention  to  one  kind  of  use,  similar  difficulties 
occur:  there  is  no  natural  and  obvious  definition  of  the  quantity 
of  pastoral  land  useful  for  a given  number  of  sheep  or  cattle,  or 
of  the  quantity  of  tillage-land  suitable  for  a given  amount  of 
labour — especially  where  the  kind  of  tillage  most  immediately 
profitable  is  that  which  exhausts  the  soil — or,  again,  of  the 
amount  that  a miner  may  legitimately  claim.  The  settlement 
of  these  questions  must  in  any  case  require  the  intervention  of 
government : but,  apart  from  these  difficulties  of  detail,  the 
general  principle  of  allowing  comjilete  property  rights  to  the 
first  occupant  does  not  seem  properly  applicable  to  land.  For  the 
economic  ground  on  which  this  jural  principle  is  based,  in  the 
case  of  the  produce  of  hunting,  fisliing,  and  other  occupations  by 
which  things  become  property  that  have  hitherto  been  unappro- 
priated, is  that  the  labour  of  .search  and  pursuit  thus  receives  its 
natural  remuneration,  without  which  thei'e  would  be  no  adequate 
inducement  to  perform  it : but  no  such  labour  is  required  in 


' On  Colonisation  (edition  of  1861),  Lecture  xiv.  p.  116. 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE 


471 


the  case  of  ordinary  land  in  a new  country : there  is  no  advan- 
tage to  the  community  in  allowing  the  first  comer  to  appropriate 
it  gratuitously  to-day,  if  someone  else  is  likely  to  come  to-morrow 
who  will  be  willing  to  pay  for  it. 

It  seems,  in  short,  that  if  land  before  it  is  occupied  has  a 
market- value,  the  competition  of  the  market  is  the  “ natural  ” 
method  of  determining  what  individual  is  to  possess  it,  the  price 
thus  obtained  belonging  naturally  to  the  community;  and  hence 
that — to  realise  natural  liberty — government  must  undertake 
the  business  of  owning  it,  so  far  at  least  as  to  arrange  for  selling 
it  in  the  most  economical  way.  Nor  can  it  even  be  laid  down 
that  this  ownership  should  be  as  brief  as  possible,  and  should 
be  transferred  at  once  by  sale  to  the  highest  bidder.  Indeed, 
it  is  obvious  that  if  more  than  a certain  limited  amount  of  land 
were  offered  for  sale  at  once,  at  whatever  price  it  would  fetch, 
the  value  of  it  would  fall  so  low  that  the  practical  effect  would 
be  nearly  the  same  as  if  gratuitous  occupation  were  allowed : 
and  if  it  be  said  that  it  should  only  be  sold  to  those  who  can 
really  use  it,  the  before-mentioned  difficulties  arising  from  the 
great  variations  in  intensity  of  use  recur  in  a different  form, — 
e.g.,  a wealthy  shepherd  could  use  a large  province  at  the  rate 
of  100  sheep  per  square  mile,  which  is  taken  to  be  the  carrying 
capacity  of  pastoral  land  in  Queensland;  but  it  would  be  ob- 
viously unreasonable  to  let  him  have  a province  for  private 
property  at  a nearly  nominal  price,  if  in  a few  years  the  progress 
of  colonisation  is  likely  to  give  large  parts  of  the  same  land 
a substantial  value  for  agricultural  purposes.  Rather  it  is  clear 
that  where  land  is  likely  to  be  in  demand  both  for  agricultural 
and  pastoral  use,  the  claims  of  the  different  uses  can  only  be 
fairly  adjusted  by  allowing  the  shepherd  a temporary  occupancy 
of  land  that  is  not  yet  required  for  agriculture. 

I conclude,  therefore,  that  government  is  acting  most  in 
accordance  with  the  principles  of  natural  liberty  if  it  allows  the 
alternative  of  sale  or  lease,  and  the  terms  of  either,  to  be  decided 
by  purely  commercial  considerations,  merely  endeavouring  to 
make  the  best  bargain  for  the  community.  But  if  so,  it  may  be 
fairly  argued  that  on  strictly  commercial  principles,  land  ought 
only  to  be  sold  at  a price  that  will  include  the  present  value  of 
the  future  increment  of  value  which  the  land  as  a whole  is 
likely  to  receive  from  the  increased  numbers  and  wealth  of  the 


472 


POLITICAL  ECONOMY 


BOOK  III 


persons  residing  on  it.  It  certainly  appears  that  if,  as  seems 
probable,  individuals  aie  not  sufEciently  interested  in  remote 
and  doubtful  gains  to  rate  this  prospective  increment  at  its  true 
value,  at  any  rate  during  the  earlier  stages  of  the  economic  life 
of  a colony,  government  ought,  during  this  fii-st  period,  not  to 
sell  the  land  at  all,  but  only  to  let  it  on  lease.  On  the  other 
hand,  we  have  to  consider  that  it  may  be  even  financialh’’  more 
advantageous  for  the  community  to  sacrifice  immediate  gain  tc 
the  end  of  promoting  immigration  by  offering  absolute  ownei’ship 
to  bond  fide  settlers : and  actually,  in  the  colonisation  of  England, 
the  greatest  coloniser  among  modern  communities,  the  financial 
interest  of  the  community  has  been  generally  subordinated  to 
this  latter  end. 

The  most  obvious  way  of  attracting  settlers  is  by  freely 
granting  land,  or  selling  it  at  low  prices,  in  such  portions 
and  under  such  conditions  as  are  thought  likely  to  secure 
the  actual  cultivation  of  the  land.  This,  in  fact,  is  sub- 
stantially the  same  thing  as  paying  a part  of  the  expenses 
of  the  transfer  of  emigrants  out  of  national  funds,  provided 
the  emigrants  are  of  the  class  that  would  in  any  case  buy 
and  cultivate  land ; since  it  obviously  makes  no  difterence  to 
such  an  emigrant  whether  it  is  the  cost  of  his  journey  or  the 
cost  of  his  purchase  of  land  that  is  artificially  cheapened  at  the 
public  expense.  In  practice,  however,  this  system,  in  the  form 
in  which  it  prevailed  generally  in  the  English  colonies  during 
the  eighteenth  century  and  the  first  quarter  of  the  nineteenth 
century,  was  not  effectually  guarded  from  being  perverted  to 
the  profit  of  speculatoi's*;  and  the  system  that  has  been  more 
recently  adopted  of  making  the  benefit  offered  to  settlers  to 
consist  more  in  the  deferring  of  payment  than  in  the  lowering 
of  price  seems  in  every  way  preferable. 

A different  and  more  elaborate  plan  of  promoting  emigi-ation 
through  the  sale  of  unoccupied  lands,  which  we  may  call  the 
Wakefieldian  system'^,  was  urged  upon  the  English  government 

^ For  example,  in  Lower  Canada,  the  regulations  restricting  to  a compara- 
tively small  number  of  acres  the  amount  that  could  be  granted  to  a single  person 
were  so  effectually  evaded  that  1,425,000  acres  were  made  over  to  about  60 
individuals  during  the  government  of  Sir  A.  Milne  (see  Merivale,  Lecture  xv.). 

- The  influence  of  Gibbon  Wakefield  on  English  Colonisation  deservedlj’ 
occupies  an  important  place  in  the  history  of  political  and  economic  speculation , 
no  less  than  in  that  of  English  colonial  policy : but  it  seems  to  be  a matter  of 


CHAP.  IV  CASES  OE  GOVEEKMENTAL  INTEREEEENCE 


473 


by  the  Colonisation  Society  from  1830  onwards,  and  partially 
carried  into  effect  for  a limited  period  in  some  of  our  Australasian 
colonies.  It  will  be  observed  that  the  immigration  encouraged 
by  the  system  of  free  grants  or  lo  w prices  is  that  of  labourers 
who  intend,  and  are  expected,  to  become  cultivators  of  their 
own  land  at  once.  Now  it  was  believed  by  Wakefield  and  his 

considerable  difficulty  to  ascertain  exactly  the  fundamental  principles  or  charac- 
teristics of  his  system.  Thus  Mill  (Political  Economy , Book  v.  c.  xi.  § 14)  represents 
it  as  an  essential  point  in  Wakefield’s  system  that  it  promotes  concentration  of 
settlements,  since  “ by  diminishing  the  eagerness  of  agricultural  speculators  to  add 
“ to  their  domain,  it  keeps  the  settlers  within  reach  of  each  other  for  purposes  of 
“co-operation.”  But  it  would  seem  that  the  “uniform  price”  on  which  Wake- 
field insisted — as  compared  with  the  varying  price  that  would  result  from  sale  by 
auction — would  tend  against  concentration,  by  increasing  the  settler’s  induce- 
ment to  select  land  for  its  fertility  rather  than  for  its  situation.  And  Wakefield 
himself  (View  of  the  Art  of  Colonisatioti,  Letter  lxviii. ) expressly  disclaims  any 
wish  to  promote  concentration  of  settlements,  provided  that  combination  and 
constancy  of  labour  are  secured  to  each  settler  by  an  abundant  supply  of  hired 
labourers.  “With  respect  to  the  choice  of  land  for  settlement,”  he  writes,  “the 
“settlers  must  be  the  best  judges...!  would  if  possible  open  the  whole  of  the 
“waste  land  of  the  colony  to  intending  purchasers.,  dispersion  or  concentration 
“is  a question  of  locality  alone.”  Again,  it'-was  not  really  an  essential  part  of 
Wakefield’s  own  scheme  that  the  proceeds  of  the  sale  of  lands  should  be  devoted 
to  the  support  of  emigration  ; though  most  writers  on  the  subject  seem  to  regard 
this  as  quite  fundamental  to  it.  Mr  Merivale  even  speaks  of  this  (On  Coloni- 
sation, Lecture  xiv.)  as  “the  great  discovery  of  Mr  Wakefield”;  and  at  the  same 
time,  while  emphasising  its  practical  value,  urges  as  a theoretical  objection 
against  Wakefield’s  system  that  while  the  “sufficient  price”  of  which  he  habitu- 
ally spoke  had  to  serve  two  purposes, — (1)  that  of  restraining  labourers  for  a 
sufficient,  and  not  more  than  sufficient,  time  from  the  acquisition  of  land,  and  (2) 
that  of  keeping  up  the  supply  of  labourers  by  gratuitous  importation, — it  was 
nowhere  shewn  that  the  price  adequate  for  the  one  purpose  might  not  be  either 
more  or  less  than  adequate  for  the  other.  But  in  Wakefield’s  own  treatise  this 
second  purpose  is  treated,  in  the  most  express  and  emphatic  language,  as  merely 
secondary  and  incidental.  “So  completely,”  he  says  (Letter  niv.),  “is  the 
“ production  of  revenue  a mere  incident  of  the  price  of  land,  that  the  price  ought 
“ to  be  imposed — if  it  ought  to  be  imposed  under  any  circumstances — even 
“though  the  purchase-money  were  thrown  away”;  the  decisive  ground  for  it 
being,  as  was  explained  in  the  preceding  letter,  that  if  only  all  labourers  were 
under  the  necessity  of  remaining  labourers,  it  would  be  “possible  and  not  difficult 
“ for  capitalists  to  enforce  contracts  for  labour  made  in  the  mother-country,”  as 
“the  temptation  of  the  labourer  to  quit  the  employer  who  had  brought  him 
“to  the  colony  would  be  no  longer  irresistible.”  In  these  circumstances  the 
plan  of  dealing  with  waste  lands  that  was  temporarily  carried  out  in  the 
Australian  Colonies  cannot  properly  be  called  Wakefield’s  scheme  : since, 
as  he  reiteratedly  affirmed,  his  “sufficient  price”  was  never  really  tried,  and 
this  was  his  cardinal  point.  But  since  the  plan  actually  adopted  was  due  to  the 
influence  of  Wakefield  and  his  friends,  and  bore  a certain  resemblance  to  his 
scheme,  I have  still  ventured  to  speak  of  it  as  “ Wakefieldian.” 


474 


POLITICAL  ECONOMY 


BOOK  III 


followers  that  the  labour  of  immigrants  so  attracted  tended  to 
lose  materially  in  efficiency  through  want  of  co-operation;  so 
that  it  would  be  a distinct  gain  to  production  if  they  were  to 
a large  extent  prevented  from  buying  land  and  then-  labour 
were  organised  under  the  direction  of  capitalist  employers.  The 
characteristic  principle,  then,  of  the  Wakefieldian  system  was 
that  it  aimed  at  attracting  such  capitalist  employers  by  pro- 
viding them  with  labourers  willing  to  work  for  hire.  With  this 
aim  it  was  proposed  to  sell  land  at  a price  so  high  that  the 
mass  of  immigrants  would  not  for  some  years  afford  to  buy 
enough  to  become  cultivators  on  their  own  account ; and  at  the 
same  time  to  devote  the  whole,  or  a fixed  and  substantial  part, 
of  the  proceeds  of  such  sales  to  the  importation  of  immigrants, 
so  that  the  immigrating  capitalists  might  always  find  an  ade- 
quate supply  of  hired  labour  ready  to  hand.  The  partial  at- 
tempt that  was  made  to  carry  out  this  system  in  our  Australian 
colonies,  for  the  15  or  20  years  fi'om  1836  onward,  had,  in  the 
opinion  of  competent  judges,  an  important  degree  of  success’. 
And  the  fact  that  it  was  afterwards  abandoned  is  hardly  e^d- 
dence  that  it  ultimately  failed ; since  its  abandonment  mav  be 
probably  attributed  to  the  mere  desire  of  obtaining  land  on 
easier  terms  generally  felt  by  the  labouring  class,  whose  influence 
over  colonial  administration  became  preponderant  when  self- 
government  with  universal  suffrage  was  granted  to  the  colonies. 

§ 13.  From  considering  the  principles  of  governmental  in- 
terference with  land  in  an  early  stage  of  a country’s  develop- 
ment, let  us  pass  to  examine  briefly  the  economic  reasons  for 
continuing  such  interference  when  this  stage  has  been  pa.ssed, 
and  the  country  has  been  fully  occupied.  We  may  conveniently 
divide  this  question  into  two  parts : asking,  first,  under  what 
limitations  land  should  be  allowed  to  pass  into  private  owner- 
ship ; and,  secondly,  why  and  how  far,  after  this  transition  has 
taken  place,  government  should  still  exercise  a special  control 
over  this  particular  kind  of  propert}'.  As  regards  the  first 
question,  it  is  obvious  that  such  portions  of  land  as  are  mani- 
festly more  useful  to  the  community  when  thrown  freely  open 
to  common  use  should  be  retained  in  public  ownership,  and 
under  governmental  management : e.g.,  roads,  navigable  rivei's 


Cf.  Mei'ivale,  Lecture  xiv.,  and  Cairnes,  Political  Essays,  Essay  i. 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE 


475 


and  inland  lakes,  natural  harbours,  public  parks,  commons,  &c. 
So,  again,  there  are  strong  reasons,  discussed  in  the  earlier  part 
of  this  chapter,  why  the  land  required  for  railroads  or  other 
similar  monopolies  should  not  be  allowed  to  pass,  except  tem- 
porarily, out  of  public  ownership : and  a general  right  should 
be  reserved  of  taking  back  from  private  owners  any  land  that 
may  be  needed  for  public  uses,  paying  for  it  its  market- value  as 
determined  independently  of  such  need,  together  with  a certain 
“ compensation  for  disturbance”  in  consideration  of  the  special 
utility  that  it  may  be  fairly  assumed  to  have  for  its  owner. 
This  right  has  been  extensively  exercised  in  recent  times  in  the 
construction  of  railways,  and  is  now  generally  recognised  in  the 
most  advanced  communities.  Further,  it  is  quite  possible  to 
allow  the  surface  of  the  soil  to  pass  completely  into  private 
hands,  while  reserving  to  the  community  the  rights  of  property 
in  certain  of  the  minerals  contained  in  it ; and,  in  fact,  some 
reservations  of  this  kind  are  found  in  the  codes  of  some  of  the 
most  advanced  communities’.  The  chief  argument  for  such 
reservations,  from  the  point  of  view  of  production,  is  that  the 
owner  of  the  land,  whether  engaged  in  the  business  of  agriculture 
or  not,  may  very  likely  not  be  the  person  best  qualified  either  to 
ascertain  the  presence  of  minerals  hidden  some  way  below  the 
surface,  or  to  decide  whether  their  extraction  will  be  remunera- 
tive; so  that  production  will  gain  if  the  right  of  discovering 
and  working  them — with  due  compensation  to  the  owner  for  the 
loss  of  the  land  thus  rendered  useless  for  agriculture — be  allowed 
to  members  of  the  community  generally^.  In  special  cases, 
however,  governmental  management  of  mines  may  be  expedient 


’ Even  in  England,  where  this  kind  of  interference  is  at  its  minimum,  gold 
and  silver  mines  are  legally  reserved  to  the  Crown. 

In  Prussia,  for  instance,  according  to  the  mining  law  of  1865  anyone 
wishing  to  bore  or  dig  (schiirfen)  for  any  of  the  minerals  to  which  this  “mining- 
“ freedom”  (Berg-hau-freiheit)  extends  must  be  permitted  to  do  so  under  con- 
dition of  paying  adequate  compensation,  provided  that  the  operation  is  not 
carried  on  in  certain  specified  places,  as  within  a certain  distance  of  buildings, 
in  churchyards,  gardens,  &c.  In  default  of  agreement  between  the  parties  as  to 
the  compensation,  it  will  be  determined  by  the  “ Ober-Berg-Amt.”  Such  com- 
pensation wilt  take  the  form  of  rent,  unless  the  operations  are  continued— or 
may  certainly  be  expected  to  last — longer  than  three  years ; in  this  latter  case 
the  landowner  may  force  the  miner  to  purchase  the  land.  If  the  miner  by 
taking  portions  of  any  given  piece  of  land  would  destroy  the  value  of  the  re- 
mainder, he  may  be  forced  to  pay  rent  for,  or  to  purchase,  the  whole. 


476 


POLITICAL  ECONOMY 


BOOK  III 


either  to  avoid  the  drawbacks  of  monopoly  in  private  hands — 
in  the  case  of  very  rare  minerals — or  to  watch  over  the  interests 
of  posterity,  just  as  in  the  case  before  discussed  of  forests. 
Turning  again  to  the  surface  of  the  land,  we  may  say  that, 
generally  speaking,  there  is  no  reason  for  keeping  ordinary 
agricultural  land  under  governmental  management, — since  the 
general  arguments  in  favour  of  private  management  are  at  least  as 
applicable  to  agriculture  as  to  any  branch  of  production, — unless, 
perhaps,  so  far  as  some  small  portions  might  advantageously 
be  retained  for  purposes  of  scientific  experiment  or  technical 
instruction.  An  exception  has,  however,  to  be  made  in  the 
case  of  land  on  which  timber  is  grown,  since  in  this  case  there 
appear  to  be  the  following  special  arguments  in  favour  of  govern- 
mental management : first,  the  economic  advantages  of  conducting 
this  business  on  a very  large  scale,  as  it  gains  much  by  highly 
skilled  and  carefully  trained  labour  which,  at  the  same  time, 
requires  a very  large  area  for  its  most  economical  application ; 
secondly  (as  was  before  noticed),  the  interest  which,  in 
certain  countries  at  least,  a community  is  believed  to  have 
in  preserving  a due  proportion  of  trees  to  the  soil  that  it 
inhabits,  owing  to  their  beneficial  effect  on  climate*;  while, 
thirdly,  it  is  thought  that  even  the  marketable  utilities  of  trees 
— especially  their  utility,  where  coals  are  scarce,  for  fuel — are  in' 
danger  of  not  being  adequately  or  most  economically  proidded 
for  distant  generations,  if  the  provision  is  left  to  private  enter- 
prise, considering  the  slow  growth  of  trees  and  the  general 
unattractiveness  of  remote  returns  to  the  private  undertaker. 

With  the  exception,  however,  of  timber,  it  is  generally 
admitted  that  the  ordinary  products  of  agriculture,  whether 
animal  or  vegetable,  are  likely  to  be  most  economically  sup- 
])lied  by  private  undertakers.  But  it  is  a different  question 
whether  it  would  not  be  expedient  to  retain  land  in  public 
owTiefship,  while  leasing  it  to  private  persons ; so  that  the 
increase  in  its  value  which  the  increase  of  population  tends  to 
cause  may  be  continually  secured  to  the  community.  This 
measure,  however,  i§  more  usually  advocated  fi-om  the  point  of 
view  of  distribution,  in  which  aspect  we  shall  consider  it  in 
a subsequent  chapter  (c.  vil.).  Actually  the  whole  rent  of 

^ In  England,  I suppose,  this  consideration  can  scarcely  have  practical 
importance. 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE 


477 


land  has  never  been  retained  by  any  government ; but  in  many 
cases  a considerable  portion  of  it  has  been  reserved,  either  under 
the  name  of  rent,  or  under  the  rather  misleading  name  of  a 
land-tax  h 

§ 14.  Assuming  that  land  is  allowed  to  pass  into  private 
ownership,  it  remains  to  consider  how  far  the  conditions  of  its 
tenure  and  transfer  should  be  placed  under  special  regulation 
by  government.  Here  it  should  be  observed  that  the  inter- 
ferences of  this  kind  that  have  actually  been  carried  out  are 
to  be  classed  under  very  different  heads,  even  if  we  confine 
ourselves  to  those  that  have  been  recommended  on  strictly 
economic  grounds  and  in  the  interest  of  production.  In  the 
first  place,  we  put  aside,  from  our  present  point  of  view,  the 
very  important  cases  in  which  European  governments^  have 
intervened  not  to  restrict  the  liberty  of  individual  owners 
but  to  render  it  more  complete ; by  removing  relics  of  feudalism 
which  divided  the  rights  of  ownership  of  land  generally  in 
various  complicated  ways  between  lords  and  cultivators,  and 
further  impeded  its  transfer  through  the  restriction  of  par- 
ticular estates  to  particular  classes — nobles  and  roturiers, 
or  nobles,  burghers,  and  peasants.  Akin  to  these  are  more 
permanent  laws  restricting  the  right  of  each  generation  to 
restrict  the  fi-eedom  of  their  successors,  by  such  bequests  or 
contracts  as  would  hamper  the  alienation  of  land,  and  tend  to 
prevent  it  from  getting  into  the  hands  of  the  persons  who  would 
make  the  best  use  of  it.  For  legislation  of  this  kind,  as  was 
before  said,  cannot  strictly  be  regarded  as  an  interference  with 
natural  liberty ; it  is  rather  a compromise  adopted  in  an  inevit- 
able collision  of  freedoms,  to  secure  the  fullest  possible  realisa- 
tion of  the  economic  advantage  of  laisser  faire.  Similar  to  this, 
again,  is  the  aim  of  another  class  of  minor  interferences, — such 
as  the  compulsory  registration  of  dealings  relating  to  land, — 
which  are  designed  to  render  the  sale  or  mortgage  of  land  more 
easy  and  less  expensive,  by  removing  the  necessity  of  compli- 
cated and  costly  legal  proceedings.  Along  with  the  above, 

1 The  distinction  between  this  reserved  share  of  rent  and  an  ordinary  tax 
will  be  examined  in  a subsequent  chapter  (c.  viii). 

- As  in  France  at  the  Revolution  of  1789  ; and  in  Prussia  by  the  legisla- 
tion of  Stein  and  Hardenburg  (1807 — 11),  further  developed  and  completed  in 
1850. 


478 


POLITICAL  ECONOMY 


BOOK  III 


again,  we  may  class  the  intervention  of  the  legislature  in  order 
to  substitute,  in  the  case  of  land  cultivated  by  other  persons 
than  its  owners,  a certain  and  definite  tenure  for  one  regulated 
by  more  or  less  uncertain  customs  and  understandings ; so  far 
as  such  legislation  does  not  override  freedom  of  contract,  but 
merely  interprets  what  is  left  vague  in  customary  agreements, 
or  defines  normal  conditions  of  letting — as  regards  length  of 
tenure,  compensation  for  improvements,  &c. — in  default  of 
express  contract  to  the  contrary.  When,  however,  the  goveni- 
mental  determination  of  the  conditions  of  letting  land  is  com- 
pulsory, and  pro  tanto  prevents  fi'eedom  of  contract  between 
owners  and  tenants,  the  interference  is  of  course  of  a much 
graver  kind ; and  such  as  can  only  be  justified  by  clear  evidence 
either  that  it  is  not  for  the  interest  of  the  landowner  to  grant 
such  terms  of  letting  as  would  give  the  tenant  the  greatest 
possible  inducement  to  make  the  land  productive,  or  that  the 
former,  if  let  alone,  is  likely  to  mistake  his  o^vn  interest. 

To  illustrate  the  kind  of  evidence  required,  I may  refer  to 
the  grounds  on  which  the  revolution  in  Irish  land-tenure  effected 
in  1881,  and  the  important  restriction  of  free  contract  relative 
to  land  in  England  in  1883,  were  advocated  from  a productional 
point  of  view.  It  was  contended  (1)  that  the  Irish  landowners, 
under  the  system  of  free  contract,  have  been  often  found  to  raise 
the  rent  so  high  as  to  leave  the  tenants  but  bare  subsistence, 
and  so  prevent  them  from  having  the  capital* — or  in  bad  times 
even  the  physical  vigour — requisite  to  render  their  labour 
adequately  efficient;  and  (2)  that  both  Irish  and  English 
landowners  have  diminished  the  tenants’  inducements  to  treat 
the  land  in  the  most  economic  way,  by  not  securing  to  them 
the  value  of  their  improvements.  How  far  these  contentions 
are  in  fact  valid,  I do  not  now  inquire ; but  we  have  before  seen 
that  the  first-mentioned  result  is  quite  a possible  one,  even  on 

' It  may  be  said  that  it  would  be  profitable  for  the  tenant  to  borrow  capital 
from  his  landlord — or  someone  else — if  he  would  be  more  than  compensated 
by  the  additional  productiveness  of  his  labour:  but  the  additional  element  of 
risk  introduced  by  the  necessity  of  relying  on  merely  personal  security  may 
render  this  unprofitable 

2 I ought  perhaps  to  say  that  I do  not  myself  approve  of  either  of  the  legis- 
lative measures  to  which  I have  referred : though  in  the  case  of  Ireland  I think 
there  were  adequate  grounds  for  extensive  interference  of  some  kind.  But  a 
sufficient  discussion  of  either  measure  would  be  obviously  irrelevant  here. 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE  479 

the  supposition  that  all  parties  are  actuated  by  enlightened 
self-interest ; since  even  when  an  increase  in  the  incomes  of 
tenants  or  labourers  would  lead  to  a more  than  equivalent 
increase  in  the  value  of  their  labour,  it  is  obviously  not  the 
interest  of  the  landlord  to  furnish  the  increment  of  income 
unless  he  is  to  ptofit  by  the  increased  efficiency.  Now  in  the 
case  we  are  considering,  the  increased  produce  would  in  the 
first  instance  be  appropriated  by  the  tenant : and  even  where 
the  loss  to  the  landlord  would  ultimately  be  compensated  by 
a rise  in  rent  or  perhaps  by  greater  regularity  in  its  payment, 
the  prospect  of  this  compensation  may  easily  be  too  remote 
and  dubious  to  induce  a prudent  landlord  to  make  an  imme- 
diate and  certain  sacrifice  of  income  in  order  to  obtain  it. 

So  again,  it  may  seem — or  even  sometimes  be — inexpe- 
dient for  the  landlord  to  give  the  tenant,  through  lease  or 
otherwise,  the  fullest  security  of  profiting  adequately  by  his 
improvement  of  the  land ; because  such  security  cannot  be 
given  without  diminishing  the  former’s  control  over  his  land 
more  than  he  likes  or  thinks  expedient.  The  simplest  method 
of  giving  this  security  is  by  a long  lease ; but  we  have  already 
noticed  the  difficulty  of  framing  a lease  that  without  hampering 
the  tenant  will  practically  make  it  his  interest  to  treat  the  land 
in  the  best  way ; and,  where  tenants  are  poor,  a long  lease  is 
open  to  the  further  objection,  in  the  view  of  the  landlord,  that 
the  benefit  of  an  unforeseen  rise  in  the  value  of  the  land  will 
accrue  entirely  to  the  tenant  for  the  period  of  the  lease,  while 
the  landlord  is  likely  to  bear  a considerable  share  of  the  loss 
due  to  an  unforeseen  fall,  through  the  actual  or  threatened  in- 
solvency of  the  tenants. 

Taking  into  account  all  difficulties  of  this  kind,  and  not 
overlooking  the  more  indefinite  loss  of  the  stimulus  given  to 
industry  by  the  sentiment  of  property,  we  may  conclude  that 
there  are  inevitable  disadvantages  to  production  involved  in 
a general  separation  of  the  ownership  of  land  from  the  business 
of  cultivating  it : which  would  probably  prevent  this  from  being 
the  common  practice  if  land  were  held  merely  as  an  instrument 
of  production.  But  in  England  this  consideration  has  been 
outweighed  by  other  powerful  motives,  in  particular  by  the 
traditional  social  prestige  and  political  influence  attaching  to 
the  possession  of  land.  Hence  some  reformers  consider  that  an 


480 


POLITICAL  ECONOMY 


BOOK  III 


important  gain  to  agricultural  production  would  be  secured  by 
breaking  down  the  tendency  of  large  estates  in  England  to 
remain  in  the  poasession  of  the  same  families  from  generation 
to  generation : and  that  this  would  be  attained  by  assimilating 
the  law  of  real  to  that  of  personal  property  and  conferring  on 
life-owmers  an  inalienable  right  of  determining  the  distribution 
of  the  property  thus  owned  among  their  children  after  their 
death*.  It  seems  doubtful,  however,  whether  even  these 
changes  would  have  the  desired  effect  in  a wealthy  country; 
since  the  peculiar  gratification  of  the  sense  of  proprietorship 
which  the  possession  of  land  gives,  and  the  attractions  of 
countiy^  residence  and  field  sports  would  still  tend  to  keep 
great  portions  of  it  in  the  hands  of  rich  persons  not  desirous 
of  pei-sonally  superintending  its  cultivation. 

The  question  of  interference  on  the  grounds  above  men- 
tioned bas  been  practically  a good  deal  mixed  up  with  one 
which,  theoretically  considered,  involves  economic  reasoning  of 
a very  different  kind : the  question,  namely,  whether  agricul- 
tural production  should  be  carried  on  on  a large  or  a small  scale. 
The  ownership  of  land  by  rich  persons,  who  do  not  personally 
manage  its  cultivation,  has  a certain  tendency  to  encourage 
large  farms,  since  it  is  less  troublesome  for  the  owner  to  collect 
rents  from  a few  large  farmers  than  from  many  small  ones ; 
and  again,  the  large  farmer,  having  more  capital,  is  not  so 
likely,  if  holding  under  a lease,  to  throw  the  greater  share  of 
any  unforeseen  losses  on  the  landlord.  Hence  it  is  a priori 
probable  that  this  system  of  ownership  prevents  the  existence 
of  a certain  amount  of  small  farming  which  might  otherwise 
be  prosperously  carried  on ; there  are,  however,  no  adequate 
reasons  for  supposing  that  farming  on  a small  scale  is  likely  to 
be  generally  more  economical,  at  least  as  regards  the  chief 
staples  of  agriculture. 

Here,  however,  another  consideration  is  often  introduced, 
which,  as  was  before  noticed,  is  not  directly  included  within 
the  scope  of  the  present  discussion,  as  I have  defined  it. 
It  is  maintained  that  the  system  of  small  farming  tends  to 
give  a greater  gross  produce,  though  a smaller  net  produce, 
than  that  of  large  fiirms ; and  therefore  ought  to  be  encouraged 
by  government,  as  tending  to  increase  population — though  not 

1 This  is  proposed  with  the  view  of  facilitating  the  alienation  of  land. 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE 


481 


average  wealth — within  a given  region.  And  this  is  certainly 
a possible  result,  if  the  increase  in  gross  produce  due  to  the 
small-farm  system  decidedly  outweighs  the  decrease  in  net 
produce : unless,  however,  the  latter  difference  were  compara- 
tively slight,  this  organisation  of  agricultural  industry  would 
be  always  in  a state  of  unstable  equilibrium,  since  the  greater 
profitableness  of  the  large-farm  system  to  employers  would  be 
continually  tending  to  introduce  it. 

Finally  we  must  notice  a kind  of  interference  which  has 
actually  taken  place  in  England,  and  has  often  been  advocated 
in  the  interests  of  production ; but  which  is  not  to  be  regarded 
as  favourable  to  production  according  to  the  definition  of  pro- 
duce adopted  in  the  present  treatise.  I refer  to  the  law  which 
gives  the  occupier  of  agricultural  land  an  inalienable  right  to 
kill  certain  kinds  of  game,  on  account  of  the  damage  done 
by  them  to  crops.  For  this  interference  with  fi-ee  contract 
can  only  be  required  for  the  end  in  view,  on  the  ground  that 
many  landlords  prefer  game  and  sport  together  to  what  they 
would  get  by  the  extra  produce  anticipated  in  consequence  of 
the  destruction  of  game  by  the  occupiers.  Hence — sport  being 
a purchasable  commodity— the  primd  facie  inference  is  that 
the  aggregate  of  utilities  actually  obtainable  from  the  land 
bears  a higher  value  than  the  material  produce  to  which  this 
legislation  sacrifices  it : so  that  the  change  is  no  more  beneficial 
to  production  (as  I conceive  it)  than  the  conversion  of  valuable 
vineyards  into  less  valuable  cornfields.  It  is,  in  fact,  rather  an 
interference  for  distribution, — as  it  tends  to  cheapen  the  com- 
modities consumed  by  the  poor,  at  the  expense  of  the  luxuries 
of  the  rich : though  its  importance  from  this  point  of  view 
is  not  likely  to  be  very  great,  under  the  existing  conditions  of 
communication  and  transport,  provided  that  freedom  of  trade 
is  maintained  unimpaired’. 

While  considering  the  case  of  game,  we  may  note  the  legal 

^ It  may  be  observed  that  the  obvious  effects  of  such  a measure  are  favourable 
to  population  in  the  region  affected  by  it,  as  its  primary  tendency  is  to  increase 
that  part  of  the  gross  produce  of  land  that  is  consumed  by  the  working  class: 
but  its  ultimate  effects  may  be  rather  hard  to  estimate,  as  we  have  to  take  into 
account  the  loss  to  the  agricultural  producers  in  any  district  that  would  result 
from  materially  diminishing  the  inducements  offered  to  the  rich  to  reside  in 
the  district.  In  an  extreme  case,  no  doubt,  a general  passion  for  sport  among 
rich  men  might  cause  a serious  and  extensive  depopulation  of  certain  regions. 

S.  P.  E.  31 


482 


POLITICAL  ECONOMY 


BOOK  III 


prohibition  of  killing  certain  kinds  of  wild  animals  during 
certain  parts  of  the  year:  i.e.,  chiefly  during  the  breeding 
season,  when  the  destruction  of  future  supply  that  would  result 
from  any  given  amount  of  slaughter  would  be  much  greater 
than  at  any  other  time.  This  interference  exemplifies  the 
theoretical  case  discussed  in  § 5 of  the  second  chapter  of  this 
Book : the  case,  that  is,  of  restrictions  to  which  it  would  be 
the  interest  of  all — or  almost  all — to  conform,  provided  that 
each  could  rely  on  their  observance  by  all  others,  but  which 
it  would  be  very  much  the  interest  of  individuals  to  break,  if 
they  were  imposed  by  mere  voluntary  mutual  agreement  with- 
out stringent  penalties  for  non-observance. 

So  far  we  have  considered  government  as  interfering  vdth 
private  management  of  land  by  way  of  regulation.  But  modem 
governments  have  also  exercised  an  important  and  apparently 
successful  influence  on  agriculture  by  carrying  out  certain 
extensive  improvements  of  land  (such  as  reclamation  with 
drainage  or  irrigation)  or  by  assisting  private  associations  for 
this  purpose  with  loans  of  capital,  guarantees  of  interest,  and 
sometimes  powers  of  compulsory  interference  with  recalcitrant 
landowners.  This  kind  of  interference  seems  to  be  theoretically 
defensible — on  the  principles  previously  laid  down  in  respect  of 
railways,  &c. — wherever  there  is  a decided  advantage  in  carry- 
ing out  the  improvements  in  question  on  a single  system  over 
a large  area.  Again,  as  I have  before  said,  there  seems  to  be 
no  special  reason  why  government  sliould  not  carry  on  the 
-business  of  lending  money  to  indi\ddual  landowners,  on  certain 
conditions ; in  the  chief  cases,  however,  in  which  operations  of 
this  kind  have  been  successfully  undertaken  by  European 
governments  in  recent  times,  the  interference — though  quite 
defensible  from  the  point  of  view  of  production — has  had  so 
markedly  a distributional  character,  that  I have  thought  it 
more  appropriate  to  reserve  it  for  a subsequent  discussion. 

Before  concluding  this  chapter  I may  perhaps  obsei've  that 
governmental  interferences  of  which  the  primary  intention 
had  no  relation  to  the  production  of  wealth  have  often  had 
important  productional  effects,  which  a statesman  ought  care- 
fully to  estimate  in  considering  their  expediency.  Thus 
{e.g.)  the  restrictions  placed  by  the  English  Factory  Acts  on 
the  labour  of  women  and  children,  in  order  to  prevent  delete- 


CHAP.  IV  CASES  OF  GOVERNMENTAL  INTERFERENCE  483 


nous  effects  on  their  health,  have  practically  had  the  effect 
of  reducing  the  normal  day’s  labour  of  male  adults  in  most  of 
the  branches  of  industry  to  which  they  have  been  extended. 
And  in  the  succeeding  chapters  in  which  we  shall  be  considering 
measures  designed  to  render  distribution  more  equitable  or 
more  economical,  we  shall  find  that  the  chief  objections  to  such 
measures  are  drawn  from  the  bad  effects  on  production  which 
are  found  or  believed  to  be  inseparable  from  them.  On  the 
other ‘hand,  it  should  also  be  observed  that  the  interferences  to 
promote  production  which  we  have  discussed  in  this  chapter 
become  in  effect  interferences  with  distribution,  so  far  as  the 
gain  resulting  from  them  accrues  to  particular  classes  in  the 
community,  or  the  expense  they  involve  is  similarly  specialised 
in  its  incidence.  This  last  remark  applies  also  to  the  operations 
of  government  discussed  in  the  preceding  chapter.  We  shall 
have  occasion  hereafter  to  notice  some  cases  in  which  this 
consideration  becomes  important. 


Note  on  compulsory  purchases  of  land. 

A peculiar  development  of  the  system  of  natural  liberty,  in 
respect  of  what  has  always  been  a difficult  point  in  this  system, — 
the  appropriation  of  land, — has  been  recently  suggested  in  a vigorously 
written  little  book  by  Mr  C.  B.  Clarke,  called  Speculations  on 
Political  Economy.  The  right  tenure  of  land  being,  in  Mr  Clarke’s 
view,  a tenure  “such  that  every  piece  of  land  shall  fall  into  the 
“hands  of  that  man  who  is  able  to  make  the  most  of  it,”  he  suggests 
that  this  might  be  sufficiently  attained  by  giving  any  man  a right 
to  take  any  piece  of  land,  provided  that  he  was  prepared  to  pay  the 
price  at  which  the  land  was  valued  by  the  owner  himself  in  a 
“ national  rate  book,”  together  with  33^  per  cent,  as  compensation 
for  disturbance.  The  valuation  being  determined  by  the  owner 
himself— I suppose  at  certain  intervals — ^no  complaint  of  spoliation 
could  arise,  and  the  necessity  of  “law  expenses,  juries,  arbitrations” 
would  be  avoided  : at  the  same  time  the  owner  would  be  restrained 
from  overvaluing  his  land  by  the  fear  of  having  to  pay  taxes  on  the 
higher  valuation,  while  the  fear  of  being  bought  out  would  tend  to 
prevent  him  from  undervaluing  it — at  any  rate  by  more  than  the 
equivalent  of  the  compensation  for  disturbance.  Mr  Clarke,  however, 
does  not  propose  that  any  land  for  which  an  offer  was  made  should 

31—2 


484 


POLITICAL  ECONOMY 


BOOK  III 


necessarily  be  sold  ; the  owner  would  have  the  alternative  of  raising 
the  value  of  his  land  in  the  national  rate-book,  on  payment  of  a fine 
for  undervaluation.  Thus  a Naboth  might  always  keep  his  vineyard: 
but  with  the  liability  of  paying  taxes  for  it  in  proportion  to  the 
amount  that  it  was  worth  to  him.  There  would,  I think,  be  some 
difficulty  as  to  the  portions  in  which  land  held  in  large  masses 
should  be  valued ; and,  unless  a purchaser  were  always  compelled  to 
take  the  whole  of  any  such  portion,  the  scheme  would  hardly  get  rid 
of  the  necessity  of  arbitration  so  completely  as  Mr  Clarke  seems  to 
suppose.  But  it  is  scarcely  necessary  to  consider  in  detail  the 
objections  to  a proposal  which  is  certainly  not  within  the  range  of 
practical  politics : I only  note  it  as  a novel  and  ingenious  device  for 
harmonising  the  conflicting  claims  of  human  beings  to  their  material 
environment,  in  accordance  with  stinctly  individualistic  principles. 


CHAPTER  V. 


FREE  TRADE  AND  PROTECTION. 

§ 1.  The  question  of  Free  Trade — in  the  special  sense  in 
which  the  term  is  opposed  to  import  duties  for  the  Protection  of 
native  industry — occupies  at  the  present  time  a very  peculiar  and 
isolated  position,  whether  we  regard  it  from  a practical  or  from 
a theoretical  point  of  view.  As  a question  of  policy,  its  position 
is  peculiar  in  this : that  freedom  of  international  trade  is  the 
only  important  part  of  the  aims  of  the  great  eighteenth  century 
movement  against  governmental  restraint  and  regulation  in 
industrial  matters,  which  has  not  been  generally  realised  in  the 
countries  that  occupy  the  front  rank  in  industrial  civilisation.  The 
old  system  under  which,  in  its  intensest  form,  the  manufacturer 
could  not  select  at  will  the  place  at  which  to  establish  himself, 
nor  the  seasons  for  his  work,  nor  work  for  all  customers,  nor  use 
the  processes  and  materials  which  he  found  fittest  for  his  pur- 
poses, nor  give  his  products  the  form  that  suited  his  customers 
best, — all  this  has  passed  away  so  completely  that  we  find  it  almost 
difficult  to  credit  the  historian’s  account  of  it.  Within  each 
modem  civilised  community,  freedom  of  transit  and  residence, 
freedom  in  choice  of  a calling,  freedom  in  the  management  of 
property  and  business — except  so  far  as  considerations  of  health 
come  in — are  now  generally  established:  not  indeed  with  absolute 
completeness — as  we  have  already  observed — but  to  an  extent 
that  constitutes  a substantial  victory  for  the  system  of  natural 
liberty.  But  though  the  triumph  of  the  new  Political  Economy 
of  the  eighteenth  century  has  been  so  striking  as  regards  the  in- 
ternal conditions  of  industry  and  trade,  its  failure  to  persuade  the 
civilised  world  to  remove  similarly  barriers  to  international  trade 
has  been  no  less  decided:  not  merely  has  universal  free  trade 


486 


POLITICAL  ECONOMY 


BOOK  III 


not  yet  arrived,  but  the  most  enthusiastic  follower  of  Cobden  can 
hardly  persuade  himself  that  the  world  is  at  present  moving 
in  that  direction.  Taking  the  world  of  West-European  and 
American  civilisation  as  a whole,  it  is  difficult  to  deny  that  the 
common  sense  of  this  civilised  world  has  pronounced  in  favour 
of  protection. 

Still,  it  may  be  said,  this  is  not  a matter  in  which  much 
deference  is  due  to  common  sense  when  opposed  to  the  clear 
demonstrations  of  science.  On  a question  of  mathematics 
we  do  not  make  common  sense  the  court  of  appeal:  and, 
in  the  view  of  “orthodox  Free  Traders,”  the  proof  of  the 
universal  expediency  of  free  trade  is  held  to  be  as  evident  and 
cogent  as  a mathematical  demonstration.  “ When  I was  asked,” 
said  Lord  Fairer*,  “ to  write  something  in  defence  of  Free 
“ Trade,  it  seemed  to  me  as  if  I had  been  asked  to  prove  Euclid  ” : 
and  this  utterance  fairly  represents  the  sentiments  of  the 
majority  of  educated  Englishmen  who  regard  themselves  as 
competent  to  pronounce  on  economic  questions.  But  such  a 
statement  strikingly  illustrates  the  isolated  position,  at  the  pre- 
sent time,  of  free  trade  regarded  from  a theoretical  point  of 
view.  For  only  a few  fanatics  would  now  use  similar  language 
in  discussing  any  other  particular  application  of  the  general  doc- 
trine of  laisser  faire\  yet  surely  if  the  universal  mischievousness, 
to  the  nations  imposing  them,  of  international  barriers  to  trade  is 
to  be  demonstrated  like  a conclusion  of  Euclid,  it  can  only  be  by 
a method  equally  applicable  to  all  cases  of  governmental  inter- 
ference for  production.  • If  we  still  held  with  the  Physiocrats  that 
the  self-interest  of  individuals  would  always  direct  them  to  the 
industrial  activities  most  conducive  to  the  wealth  and  well-being 
of  the  community  of  which  they  are  members, — then,  doubt- 
less, the  universal  expediency  of  free  trade  might  be  simply 
demonstrated  by  mere  deduction  from  this  sweeping  proposi- 
tion. I conceive,  however,  that  this  old  belief  in  the  harmony 
of  the  interest  of  each  industrial  class  with  the  interest  of  the 
whole  community  has  lost  its  hold  on  the  mind  of  our  age : and 
that  the  need  of  governmental  interference  to  promote  produc- 
tion is  admitted  by  economists  generally  in  several  at  least  of 
the  cases  discussed  in  the  last  chapter.  And,  if  so,  it  appears 


^ Free  Trade  and  Fair  Trade,  p.  1. 


CHAP.  V 


FREE  TRADE  AND  PROTECTION 


487 


to  me  that  the  foundation  on  which  the  old  short  and  simple 
confutations  of  protection  were  once  logically  erected  has  now 
been  knocked  away : and  that  the  fashion  which  still  lingers  of 
treating  the  protectionist  as  a fool  who  cannot  see — if  he  is  not 
a knave  who  will  not  see — what  is  as  plain  as  a proof  of  Euclid 
is  really  an  illogical  survival  of  a mere  fragment  of  what  was 
once  a coherent  doctrine. 

I do  not  mean  to  say  that  the  broad  general  argument  for 
industrial  liberty  has  lost  its  force, — I have  already  expressed 
strongly  the  opposite  opinion, — but  I think  that  in  the  natural 
development  of  economic  theory  it  has  come  to  be  recognised  as 
merely  a first  approximation  to  the  truth,  and  its  necessary 
theoretical  limitations  and  exceptions  have  come  to  be  more 
clearly  distinguished,  classified,  and  systematised.  And  from 
the  theoretical  point  of  view  thus  attained,  consistency  (I  think) 
requires  us  to  meet  the  drift  of  the  civilised  world  towards  pro- 
tection by  something  more  relevant  than  an  obstinate  repetition 
of  an  essentially  antiquated  mode  of  refutation.  Practically  I 
am  myself  decidedly  opposed  to  this  drift  of  popular  opinion  and 
governmental  policy;  herein  differing  somewhat  from  several 
German  writers  by  whom  my  general  theoretical  view  of  free 
trade  has  been  anticipated,  and  from  whom  it  has  been  largely 
derived.  I agree,  indeed,  with  these  writers  in  holding,  as 
a conclusion  of  abstract  economic  theory,  that  protection,  in 
certain  cases  and  within  certain  limits,  would  probably  be 
advantageous  to  the  protecting  country,- — and  even,  perhaps, 
to  the  world, — if  only  it  could  be  strictly  confined  to  these 
cases  and  kept  within  these  limits : but  I am  nevertheless 
strongly  of  opinion  that  it  is  practically  best  for  a government 
to  adhere  to  the  broad  rule  of  “ taxation  for  revenue  only  ” — at 
any  rate  in  a free  community  where  habits  of  commercial  enter- 
prise are  fully  developed.  My  ground  for  this  opinion  is  that  I 
do  not  think  \ye  can  reasonably  expect  our  actual  governments 
to  be  wise  and  strong  enough  to  keep  their  protective  inter- 
ference within  due  limits;  owing  to  the  great  difficulty  and 
delicacy  of  the  task  of  constructing  a system  of  import  duties 
with  the  double  aim  of  raising  revenue  equitably  and  protecting 
native  industry  usefully,  and  the  pressure  that  is  certain  to  be 
put  upon  the  government  to  extend  its  application  of  the  prin- 
ciple of  protection  if  it  is  once  introduced.  I think,  therefore. 


488 


POLITICAL  ECONOMY 


BOOK  m 


that  the  gain  that  protection  might  bring  in  particular  cases  is 
always  likely  to  be  more  than  counterbalanced  by  the  general 
bad  effects  of  encouraging  producers  and  traders  to  look  to 
government  for  aid  in  industrial  crises  and  dangers,  instead  of 
relying  on  their  own  foresight,  ingenuity,  and  energy ; especially 
since  the  wisest  protection  in  amy  one  country  would  tend  in 
various  ways  to  encourage  unwise  protection  elsewhere. 

Here,  however,  we  are  primarily  called  upon  to  consider  how 
far  abstract  economic  theory  recognises  cases  in  which — taken  by 
themselves — protective  duties  may  be  expedient : and  I think  it 
clear  that  the  sweeping  answer  which  orthodox  free-traders  give 
to  this  question  is  not  justified.  I grant  that  the  pervianeivt 
stoppage  of  a channel  of  trade  which  free  competition  would  open 
could  not  tend  to  increase  the  wealth  of  the  industrial  society 
formed  by  the  aggregate  of  nations  whose  trade  is  thus  restricted 
— supposing  such  nations  to  be  composed  of  “ economic  men.” 
But  I do  not  think  that  this  universal  negative  can  be  established 
in  the  case  of  temporary  protection,  even  if  considered  from  a 
cosmopolitan  point  of  view ; still  less  if  it  be  considered  solely 
with  reference  to  the  interests  of  a particular  nation. 

§ 2.  The  most  important  exceptional  case  is  that — 
recognised  by  J.  S.  Mill* — of  “ protecting  duties  imposed 
“ temporarily  in  hopes  of  naturalising  a foreign  industry,  in  itself 
“perfectly  suitable  to  the  circumstances  of  the  country.”  Of 
course  such  a duty — if  needed  and  effective — imposes  a tax  on 
the  consumers  of  the  article  protected.  But  it  is  quite  possible 
that  the  cost  thus  incurred  may  be  compensated  to  the  com- 
munity by  the  ultimate  economic  gain  accruing  from  the 
domestic  production  of  a commodity  previously  imported ; 
while  yet  the ’initial  outlay,  that  would  be  required  to  establish 
the  industry  without  protection,  could  not  be  expected  to  be 
ultimately  remunerative  to  any  private  capitalists  who  under- 
took it.  This  would  be  the  case  if  the  difficulties  of  introducing 
the  industry  were  of  such  a kind  that,  when  once  overcome  by 
the  original  introducers,  they  would  no  longer  exist  for  others, 
or  would  exist  in  a much  smaller  degree:  since  in  that  case, 
almost  as  soon  as  the  industry  began  to  be  profitable,  com- 
petition within  the  country  would  tend  to  bring  down  prices 


’ Political  Economy,  Book  v.  c.  x.  § 1. 


CHAP.  V 


FREE  TRADE  AND  PROTECTION 


489 


to  a point  at  which  they  would  be  remunerative  to  the  later 
comers,  but  not  to  the  introducers  of  the  industry  who  had  borne 
the  initial  sacrifices. 

It  may  be  convenient  to  illustrate  this  by  contemplating  a 
particular  hypothetical  case.  Suppose  then  that  a trade  is  at 
present  carried  on  between  a mainly  agricultural  district  (A) 
and  a largely  manufacturing  district  (M),  in  which  M sends 
manufactures  to  A in  exchange  for  corn:  while  yet  A is  in 
respect  of  natural  resources  not  materially  less  adapted  for 
the  manufactures  in  question  than  M.  And  for  simplicity,  we 
will  further  suppose  that  there  is  no  material  difference  in 
the  average  returns  to  labour  (of  the  same  quality)  and  capital 
in  the  two  districts  respectively’;  and  that  the  new  manufac- 
tures can  be  established  in  A by  means  of  floating  capital 
which  would  otherwise  be  mainly  employed  in  corn-growing. 
It  is  evident,  then,  that  the  employment  of  this  capital  in 
manufactures  rather  than  corn-growing  will  be  economically 
advantageous  to  the  two  districts  taken  together  if  the  saving 
it  causes  in  the  cost  of  carriage  of  corn  and  manufactures  is  not 
outweighed  by  a loss  of  some  other  kind.  And  it  seems  likely 
that  this  will  be  the  case,  provided  (l).that  the  superiority 
of  A over  M in  the  production  of  corn  falls  decidedly  short 
of  the  degree  that  would  render  it  profitable  for  the  latter 
to  pay  the  whole  expense  of  a trade  in  corn  from  the  former ; 
and  (2)  that  no  such  advantages  from  division  of  labour  would 
be  gained  by  the  aggregation  of  all  the  manufactures  in  M, 
as  would  materially  outweigh  the  gain  in  effectiveness  of 
A’s  labour,  which  may  be  expected  to  result  from  the  new 
opportunities  of  producing  profitably  various  kinds  of  agri- 
cultural produce,  not  well  adapted  for  transportation,  and 
generally  fi-om  the  greater  variety  of  occupations  opened  by 
the  change. 

Supposing  then  that  in  this  way  there  would  be  a net  gain 
to  the  community  in  the  long  run,  from  the  introduction  of  the 
manufacture  into  A,  it  is  further  apparent  that  the  interven- 
tion of  government,  by  protective  duties  or  otherwise,  will  be 
needed  in  order  to  realise  this  gain,  if  a private  undertaker 

* It  would  be  easy  to  shew  that  the  main  argument  would  not  be  substantially 
Siffected — though  it  would  become  somewhat  more  complicated — if  the  returns 
to  labour  and  capital  were  taken  to  be  different  in  the  two  districts. 


490 


POLITICAL  ECONOMY 


BOOK  III 


would  have  no  prospect  of  securing  a share  of  it  sufficient  to 
compensate  him  for  the  disadvantages  against  which  he  would 
have  to  struggle,  under  open  competition,  during  the  earlier 
years  of  his  undertaking.  Among  such  initial  disadvantages 
the  most  important  appear  to  be  the  following: 

(1)  the  difficulty  of  obtaining  the  requisite  skilled  labour 
without  paying  an  extra  price  for  it ; 

(2)  the  difficulty  of  establishing  a business  connexion;  likely 
to  be  aggravated  by 

(3)  the  danger  of  a combination  of  manufacturei-s  in  M, 
who  may  lower  their  prices  temporarily  to  ruin  their  rivals 
in  A ; 

(4)  the  difficulty  of  effecting  simultaneously  all  the  in- 
dustrial changes  required  for  the  commercial  success  of  any  one 
branch  of  manufacture ; (e.g.)  the  manufacturers  in  A may 
lose  by  having  to  obtain  instruments  or  materials  from  M or 
some  neighbouring  region,  while  yet  A may  be  no  less  well 
fitted  for  the  production  of  such  instruments  and  niaterials. 

If  on  these  or  other  grounds  the  manufacturer  in  A 
would  have  to  incur  a considerable  temporarj-  loss,  it  is  easy  to 
shew  that  he  may  not  be  able  to  obtain  adequate  compensation 
by  the  share  he  could  secure  of  the  subsequent  gain  to  society, 
when  the  manufacture  is  firmly  established.  For  this  gain  will 
consist  chiefly  in  the  saving  of  the  cost  of  transport  of  manu- 
factures ; but  of  this  he  would  be  only  likely  to  secure  a portion 
for  a short  time ; since,  after  he  had  overcome  his  initial 
disadvantages,  he  would  probably  have  to  transfer  a part  of  the 
saved  cost  to  the  consumer  in  lowered  prices,  in  order  to  drive 
the  manufacturers  of  M out  of  his  home  market ; and  he  would 
only  enjoy  his  remaining  extra  profit  for  a short  time,  before  it 
would  begin  to  be  reduced  by  the  competition  of  new  men  fi-ee 
from  the  burden  of  the  initial  disadvantages. 

In  the  circumstances,  the  imposition  of  a protective  duty 
on  manufactures  in  A for  a certain  time,  sufficient  to  induce 
private  capitalists  to  undertake  the  manufacture,  may  be  a 
profitable  outlay  for  the  community  as  a whole,  resembling 
the  payment  of  guaranteed  interest  on  the  capital  of  a new 
railway ; except  that  in  the  case  of  a protective  duty  the  outlay 
is  defrayed  by  the  consumers  of  the  article  protected,  and  ought 


CHAP.  V 


FREE  TRADE  AND  PROTECTION 


491 


to  be  considered,  in  the  adjustment  of  taxation,  as  a special  tax 
on  this  class  of  persons. 

I have  never  seen  any  serious  attempt  to  shew  by  general 
economic  reasoning  that  the  case  above  analysed,  in  which 
the  most  enlightened  private  enterprise  would  fail  to  turn 
to  account  an  important  opportunity  of  industrial  improve- 
ment, is  one  that  cannot  occur ; or  to  shew  that  if  it  did  occur, 
a “protecting  duty  continued  for  a reasonable  time”  would 
never  be  “the  least  inconvenient  mode  in  which  a nation  could 
“ tax  itself”  to  defray  the  cost  of  the  improvement.  What  free- 
traders usually  urge  against  this  as  a practical  conclusion  is 
that  experience  shews  that  such  a duty  when  once  imposed  is 
not  likely  to  be  taken  off,— that  the  protection  designed  to  be 
temporary  will  practically  become  permanent.  And  I admit 
fully  the  force  of  this  appeal  to  experience : but  the  considera- 
tion thus  adduced  does  not  strictly  belong  to  economic  theory: 
it  is  a political  argument,  the  use  of  which  tacitly  concedes  the 
economic  correctness  of  the  protectionist’s  reasoning. 

8o  far  we  have  been  considering  temporary  protection  as  a 
means  of  introducing  an  advantageous  change  in  industry.  But 
it  is  theoretically  possible  that  it  may  be  similarly  useful  to 
prevent  an  inexpedient  change.  It  is  conceivable  that  under 
open  competition  a certain  industry — e.g.,  wheat-growing — estab- 
lished in  one  district  (A)  may  become  teTnporarily  so  un^ 
profitable  as  to  be  abandoned,  in  consequence  of  an  important 
advantage  enjoyed  by  the  corresponding  industry  in  another 
district  (B);  while  at  the  same  time  this  advantage  may  be  so 
transient, — as,  for  instance,  if  it  consists  in  a natural  fertility 
that  tends  to  be  rapidly  exhausted, — that  after  a very  limited 
period  the  same  industry  will  tend  to  be  revived  again  in  A. 
In  this  case  it  is  manifestly  possible  that  the  loss  on  the 
whole  through  the  waste  of  capital  involved  in  the  two 
changes  may  outweigh  the  gain  from  the  greater  cheapness 
of  the  products  of  the  industry  dui’ing  the  interval  between 
the  changes : so  that  it  would  be  on  the  whole  profitable 
to  A and  B together  to  maintain  the  industry  by  protection. 
It  must,  however,  be  admitted  that,  actually,  the  difficulty 
of  definitely  forecasting  future  changes  of  industry  would  at 
best  render  this  application  of  protection  a highly  speculative 
employment  of  social  capital. 


492 


POLITICAL  ECONOMY 


BOOK  III 


§ 3.  It  will  be  seen  that  the  argument  for  temporary  pro- 
tection— in  both  the  cases  above  stated — is  theoretically  valid 
from  whc^t  I have  called  a “cosmopolitan”  point  of  view;  that  is, 
if  we  con;5ider  the  interests  of  the  two  districts  taken  together, 
and  not  merely  that  of  the  district  whose  industry  is  protected. 
But  the  theoretical  possibility  that  laisser  faire  may  not  lead 
to  the  most  economical  local  distribution  of  labour  and  capital  is 
of  practical  importance  at  present  solely  from  the  division  of  the 
civilised  world  into  separate  nations,  whose  commercial  policy  is 
understood  to  be  framed  with  a view  to  their  respective  sectional 
interests : since  the  arguments  for  protecting  a nascent  industry 
are  much  stronger  when  we  consider  the  interests  of  the  protect- 
ing nation  alone.  For  not  only  in  the  case  supposed  would  this 
nation  receive  the  gain  of  the  industrial  improvement  realised, 
while  the  other  would  bear  the  (smaller)  loss  inseparable  from 
such  gain;  but  it  is  further  possible  for  the  former  in  certain  cases 
to  throw  a portion  of  the  expense  of  protection  on  the  foreigners 
whose  manufactures  it  partially  excludes’.  This  latter  result 
would  generally  be  possible  for  a time,  if  the  protecting  country 
supplied  a considerable  part  of  the  whole  demand  for  the  foreign 
products  against  which  the  protective  duty  was  directed : since 
the  sudden  and  extensive  reduction  in  the  demand  for  these  pro- 
ducts which  the  duty  would  cause  must  tend  to  lower  their  price 
at  least  temporarily.  Free-traders  are  of  course  right  in  point- 
ing out  that,  so  far  as  this  is  the  actual  effect  of  import  duties, 
such  duties  tend  to  miss  their  primary  end  of  protecting  native 
industry;  since  to  whatever  extent  the  foreign  products  thus 
lowered  in  price  are  still  purchiised,  to  that  extent  the  native 
products  are  not  encouraged.  But  this  in  no  way  proves  the 
inexpediency  of  the  duties  in  question,  since  they  may  verj" 
well  give  adequate  encouragement  to  native  industr}"  without 
completely  excluding  foreign  products : and  it  cannot  be  an 
objection  to  them  from  a purely  national  point  of  view  that 
a part  of  their  effect  is  merely  to  levy  a tribute  on  foreigners 
for  the  national  exchequer^.  Of  course  in  most  cases  this  tribute 

’ It  is  also  to  be  noted  that  the  initial  diflBoulties  of  starting  a new  industry 
are  likely  to  be  on  the  whole  greater,  when  the  established  rival  against  which  it 
would  have  to  compete  is  a foreign  rival : though  I do  not  think  that  this  would 
be  the  case  necessarily. 

2 It  may  be  convenient  to  shew  by  a simple  hypothetical  case  how  a duty 


CHAP.  V 


FREE  TRADE  AND  PROTECTION 


493 


will  be  merely  temporary ; since  the  reduction  in  the  foreign  pro- 
ducers’ profits  which  must  occur  in  the  case  supposed  will  drive 
them  from  the  industry  in  question,  until  either  the  price  rises 
again  or  the  protecting  country  obtains  its  whole  supply  from 
native  sources.  But,  firstly,  the  protection  that  we  are  con- 
sidering is  supposed  to  be  merely  temporary:  so  that  even  a 
temporary  sharing  of  the  expense  of  it  by  foreign  producers  may 
reduce  the  burden  of  it  to  an  important  extent.  And,  secondly, 
if  the  industry  happens  to  be  one  in  which  a large  amount  of 
capital  is  so  firmly  invested  that  it  cannot  be  withdrawn  fi-om 
it  without  great  loss,  except  very  gradually,  the  period  during 
which  the  producers  will  submit  to  lowered  profits  will  be  corre- 
spondingly prolonged.  And,  thirdly,  the  foreign  producers — or 
some  of  them — may  be  in  a varying  degree  exempt  from  the 
equalising  effects  of  competition,  either  generally,  or  in  the 
markets  of  the  protecting  country : in  consequence  of  which  they 
may  have  been  making  extra  profits  by  their  transactions  in  these 
markets ; so  that  even  a considerable  and  permanent  reduction 
of  profits  may  not  lead  them  to  abandon  their  business.  This 
may  happen  in  various  ways — thus  (e.g.)  single  producers,  or 
combinations,  in  a country  (A)  may  monopolise  the  manufacture 
of  certain  commodities  sold  in  another  country  (B) ; and  may  be 
thereby  enabled  to  sell  their  products,  if  untaxed,  for  a price  so 
high  that  even  when  reduced  by  the  whole  amount  of  a protective 
duty  imposed  in  B it  would  still  remain  fairly  remunerative. 
In  these  circumstances  there  is  no  theoretical  means  of 
determining  generally  how  far  the  imposition  of  the  duty  will 
tend,  even  ultimately,  to  raise  the  price  of  the  taxed  commodities 
in  Bh  Again,  some  among  the  producers  in  question  may  have 
special  advantages  as  compared  with  the  rest,  in  producing  for 

may  at  once  protect  the  native  manufacturer  adequately  and  recoup  the  country 
for  the  expense  of  protecting  him.  Suppose  that  a 5 per  cent,  duty  is  imposed 
on  foreign  silks’;  and  that,  in  consequence,  after  a certain  interval,  half  the  silks 
consumed  are  the  product  of  native  industry,  and  that  the  price  of  the  ■whole 
has  risen  2^  per  cent.  It  is  obvious  that,  in  these  circumstances,  the  other 
half  which  comes  from  abroad  yields  the  State  5 per  cent.,  while  the  tax  levied 
from  the  consumers  on  the  whole  is  only  2^  per  cent. ; so  that — apart  from  the 
cost  of  collecting  the  duty— the  protecting  nation  in  the  aggregate  contributes 
nothing  to  the  expense  of  protection,  which  falls  entirely  on  the  foreign  producers. 

1 It  is  even  possible,  in  the  case  supposed,  that  the  price  of  the  taxed  com- 
modities may  not  rise  in  B at  all — in  which  case,  of  course,  the  tax  would  not 
be  protective. 


494 


POLITICAL  ECONOMY 


BOOK  III 


the  foreign  markets.  One  obvious  advantage  of  this  kind  is 
that  of  situation.  Thus,  suppose  that  A has  been  supplied  with 
coal  from  two  groups  of  coal-mines  in  B,  one  of  which  is  situated 
on  the  side  adjoining  A and  the  other  on  the  side  remote  from 
it : and  suppose  for  simplicity  that  the  mines  yield  coal  of  the 
same  quality  at  the  same  cost  of  extraction.  Then  if  a protective 
duty  of  4s.  a ton  is  laid  by  A on  imported  coal,  raising  the  price 
of  coal  in  A 2s.  a ton,  the  result  may  be  that  after  a time  it 
ceases  to  be  profitable  to  send  coal  into  A from  the  remoter 
mines  of  B,  while  it  still  remains  profitable  to  send  it  from 
the  nearer  ones,  though  to  a diminished  extent,  and  for  a 
diminished  profit. 

In  short:  unless  foreign  products  are  completely  excluded 
by  import  duties,  such  duties  may  partly  have  the  effect  of 
levying  a tribute  on  foreign  producers,  the  amount  and  duration 
of  which  may  in  certain  special  cases  be  considerable.  Of  course 
such  tribute-levying  will  generally  be  a game  that  both  countries 
can  play  at  to  a certain  extent : hence  the  danger  of  suffering 
from  retaliatory  imposts  may  render  protective  duties  inexpedient 
even  when,  apart  from  this  danger,  they  would  be  economically 
advantageous  on  the  whole.  On  the  other  hand,  if  the  broad  safe 
rule  of  “taxation  for  revenue  only”  is  once  abandoned,  it  may 
be  expedient  for  a country  injured  by  the  import  duties  of  an- 
other to  impose  similar  duties  in  the  way  of  retaliation  even 
when  they  are  in  themselves  economically  disadvantageous, — just 
as  it  may  be  expedient  to  incur  a greater  cost  in  actual  warfare, 
in  order  to  prevent  or  punish  more  violent  injuries  to  commerce. 
But,  in  any  case,  to  consider  more  particularly  the  conditions 
under  which  such  retaliatory  measures  are  to  be  recommended 
belongs  rather  to  the  practice  of  state-craft  than  to  the  art  of 
political  economy. 

We  have,  however,  in  estimating  the  economic  loss  and  gain 
of  protection,  to  take  into  account  certain  secondary  effects  of 
protective  duties,  which  are  of  a somewhat  mixed  kind.  Sup- 
posing trade  to  be  in  equilibrium  at  the  time  that  the  demand 
in  A for  B’s  commodities  is  artificially  restricted  by  import 
duties  raising  their  price,  and  supposing  that  other  things — 
including  the  demand  in  B for  A’s  commodities — remain  un- 
changed, one  obvious  result  will  be  that  B will  import  more 
than  she  exports ; hence  in  order  to  restore  the  balance  of  trade, 


CHAP.  V 


495 


FREE  TRADE  AND  PROTECTION 

a certain  readjustment  of  prices  will  be  necessary  by  which  B 
will  in  most  cases  tend  to  obtain  a somewhat  smaller  aggregate 
of  imports  on  somewhat  less  advantageous  terms.  This  re- 
striction on  B’s  import  trade  may  possibly  not  reduce  materially 
the  amount  of  her  imports  from  A,  if  the  commodities  supplied 
by  A are  strongly  demanded  in  B;  since  the  price  of  such 
imports  may  be  paid  for  indirectly  by  transferring  to  the 
merchants  of  A the  debts  of  other  countries  who  import 
from  B.  In  this  case  the  secondary  effects  of  A’s  protection 
on  the  trade  between  A and  B will  be  on  the  whole  favourable 
to  A.  On  the  other  hand,  the  mM-chants  of  B will  tend  ceteris 
paribus  to  buy  from  a country  to  which  they  also  sell : and, 
therefore,  if  the  products  of  A are  closely  pressed  in  the  markets 
of  B by  the  competition  of  other  countries,  the  protection 
given  by  A to  one  branch  of  her, industry  may  very  likely 
have  the  secondary  effect  of  inflicting  a blow  upon  another 
branch,  namely,  that  which  previously  supplied  the  exports  from 
A to  B. 

§ 4.  I have  now  to  call  attention  to  an  oversight  in  the 
ordinary  exposition  of  the  benefits  of  free  trade,  which  is  of 
some  importance  when  the  di  sion  of  the  world  into  separate 
nations  is  taken  into  account  and  the  interests  of  a single  nation 
alone  are  considered.  It  is  often  assumed,  expressly  or  tacitly, 
that  when  a class  in  a given  nation  can  obtain  any  kind  of  com- 
modities cheaper  through  foreign  trade,  the  nation  as  a whole 
must  be  benefited  by  their  so  obtaining  it.  What  is  overlooked 
is  the  possibility  that  the  portion  of  the  nation  from  which 
employment  is  withdrawn  by  the  change  cannot  be  employed 
'within  their  own  country  without  a loss  of  utility  on  the  whole 
greater  than  the  gain  from  the  cheaper  foreign  supply  of  the 
commodities  they  were  producing  before  the  change.  I do  not 
think  this  result  at  all  a probable  one,  in  the  case  of  a country 
as  large  and  as  industrially  advanced  as  England.  But  I think 
it  must  be  admitted  in  any  theoretical  treatment  of  the  subject 
that  in  order  to  realise  the  economic  advantage  obtainable  by 
free  trade  between  two  countries,  a displacement  of  labour  and 
capital  out  of ’one  of  the  countries  may  be  necessary : so  that  the 
aggregate  wealth  of  the  persons  living  in  one  of  the  countries 
may  be  reduced  by  the  change. 

It  may  be  worth  while  to  illustrate  this  result  by  considering 


496 


POLITICAL  ECONOMY 


BOOK  III 


an  extreme  hypothetical  case.  Suppose  a country  (A)  so  thickly 
populated  that  additional  agricultural  produce  could  not  be 
obtained ’from  the  soil  except  at  a rapidly  increasing  expense; 
and  suppose  that  one-third  of  its  actual  produce  of  this  kind — 
say,  for  brevity,  its  corn — is  now  consumed  by  the  persons  engaged 
in  its  chief  branches  of  manufacture.  Suppose  that  the  countiy, 
having  been  strictly  protected,  adopts  free  trade,  and  that 
consequently  the  manufactures  in  question  are  obtained  at  half 
the  price  from  another  country  (B)  in  exchange  for  com:  and 
for  simplicity  let  us  assume  that  the  result  of  the  fall  in  price  is 
that  the  same  total  price  is  paid  for  the  manufactures  annually 
consumed.  What  then  are  the  manufacturing  labourers  thrown 
out  of  work  by  the  change  to  do  ? The  course  most  obviously 
suggested  by  the  circumstances  is  that  they  should  emigrate 
and  supply  the  labour  required  in  the  extended  manufactures  of 
B,  or  in  the  newly  developed  trade  between  A and  B.  If  they 
do  not  do  this,  there  seems  no  general  ground  for  assuming  that 
they  will  all  be  able  to  find  employment  in  A,  as  remunerative 
as  that  withdrawn  from  them.  No  doubt  as  the  cost  of  pro- 
duction in  agriculture  may  he  assumed  to  increase  continuously, 
a certain  amount  of  additional  labour  may  now  be  employed  in 
agriculture  which  will  be  more  productive  on  the  whole  than 
some  of  the  labour  employed  before  the  trade  was  opened, — the 
diminution  in  the  amount  of  corn  produced  by  each  new 
labourer  being  more  than  balanced  by  the  increased  power  of 
the  corn  to  purchase  manufactures.  But  if  the  additional  labour 
is  only  applicable  at  a rapidly  increasing  cost,  the  point  will 
very  soon  come  at  which  this  balance  will  be  reversed : and  it  is 
quite  conceivable  that  a portion  of  the  labourers  thrown  out  of 
manufacturing  employment  could  not,  in  the  present  condition 
of  industry,  be  employed  in  A in  agriculture  so  as  even  to  provide 
their  own  consumption.  And  if  they  could  not  be  profitably 
employed  in  agriculture  it  is  theoretically  possible  that  they 
could  not  be  so  employed  at  all ; so  that  the  natural  result  of 
free  trade  may  be  that  A will  only  support  a smaller,  population 
and  that  its  aggregate  wealth  may  be  diminished  by  the  change. 
The  fear  of  such  a result  as  that  just  described  has  undoubtedly 
been  important  among  the  motives  that  have  operated  on  the 
side  of  protection.  I think  that  the  alarm  has  usually  been 
without  much  practical  justification : but  I think  that  it  ought 


CHAP.  V 


FREE  TRADE  AND  PROTECTION 


497 


to  be  met  not  by  a fallacious  general  demonstration  that  the 
result  feared  cannot  happen,  but  by  a careful  exposition  of  the 
reasons  why  it  is  not  likely  to  happen  in  any  particular  case  to 
an  extent  that  ought  to  influence  a statesman’s  action. 

Note.  In  the  above  discussion  I have  confined  my  attention  as  far 
as  possible  to  such  arguments  as  are  strictly  economic  and  naturally 
lend  themselves  to  an  abstract  and  technical  treatment.  There  are, 
I need  hardly  say,  several  other  considerations  both  for  and  against 
protection,  which  would  have  to  be  carefully  weighed  in  dealing 
with  the  question  from  a directly  practical  point  of  view ; one  of 
which  will  come  to  be  discussed  in  the  next  chapter,  in  which  I shall 
pass  to  consider  governmental  interference  with  a view  to  more 
equitable  distribution. 


s.  P.  E. 


32 


CHAPTER  VI. 

THE  PRINCIPLES  OF  DISTRIBUTIVE  JUSTICE. 

§ 1.  In  the  preceding  chapters  we  have  considered  the  gi-ounds 
and  limits  of  governmental  interference  so  far  as  its  end  is  the 
most  economic  production  of  purchasable  utilities  estimated  at 
any  given  time  at  their  market  value.  Many,  however,  of 
the  particular  kinds  of  interference  that  we  have  had  occasion 
to  discuss  are  commonly  recommended  not  from  this  point  of 
view  alone,  but  also  as  conducive  to  a better  distribution  of 
produce ; whether  this  better  distribution  is  expressly  judged  to 
be  such  because  it  is  more  economic  (in  the  sense  above 
explained);  or  whether — as  is  more  ordinarily  the  case — it  is 
preferred  and  commended  as  more  “just”  or  “equitable.” 
On  the  other  hand,  such  interferences  are  often  condemned 
on  grounds  of  justice : as  involving  a violation  of  the 
rights  of  individuals.  In  the  following  chapter  I propose  to 
I'scuss  governmental  interference  with  distribution — including 
the  comprehensive  schemes  for  such  interference  recommended 
by  socialist  or  semi-socialist  writers — from  a purely  economic 
or  utilitarian  point  of  view ; considering  how  far  indi\ddualism 
or  socialism  may  be  expected  to  lead  to  most  happiness,  so  far 
as  this  depends  on  the  production  and  distribution  of  the  pro- 
duce of  industry.  In  my  view  this  is  the  consideration  jhat 
ought  to  be  decisive  with  the  statesman  and  the  philanthropist. 
But  it  seems  expedient  to  clear  tlie  way  for  this  discussion  by  a 
brief  examination  of  other  ethical  views  of  the  distribution  of 
wealth  and  of  the  social  order  on  which  it  mainly  depends ; 
since  there  are  still  many  thoughtful  persons  who  consider 
the  present  individualistic  organisation  of  society  to  be  abso- 
lutely right,  regarding  all  interference  with  private  property  as 


CHAP.  VI  PRINCIPLES  OF  DISTRIBUTIVE  JUSTICE 


499 


“ spoliation,”  and  all  interference  with  free  contract  as  “ tyranny 
“ of  the  State  over  the  individual.”  On  the  other  hand,  there 
are  socialists  who,  with  no  less  sincerity,  pronounce  private 
property  generally — or  private  property  in  the  instruments  of 
production — to  be  “robbery,”  and  regard  the  wages-contracts 
resulting  from  it  as  the  manifestation  of  the  “enslavement  of 
“labour  by  capital.” 

The  opposition  between  the  two  views  is  violent  and  at 
first  sight  irreconcileable ; I think,  however,  that  it  will  be  found 
possible  to  reduce  it  materially  by  careful  consideration  of  the 
opposing  doctrines,  and  so  ultimately  to  find  a common  ground  on 
which  a profitable  discussion  may  be  conducted  between  them. 

It  may  seem  that  such  a discussion  has  not  sufficient  bearing 
on  practical  problems  to  be  appropriately  included  in  this  part 
of  my  treatise.  And  no  doubt  the  proposal  to  abolish  pi  Ate 
property — even  if  limited  to  the  instruments  and  materir.is  of 
production — cannot  be  said  to  come  as  yet  within  the  range  of 
a statesman’s  consideration;  except  as  an  actual  or  possible 
source  of  dangerous  and  disordering  agitation  among  the  poorer 
classes.  But  the  proper  application  of  the  notions  “just,” 
“fair,”  “equitable,”  &c.  to  different  parts  of  the  existing  distri- 
bution of  wealth  is  undeniably  a matter  for  practical  considera- 
tion; since  the  demand  that  wages,  profits,  rents  should  be 
“fair”  is  continually  made  and  approved  by  large  sections  of 
the  community  who  would  shrink  from  any  scheme  of  whole- 
sale interference  with  the  rights  of  property.  And  we  shall,  I 
think,  obtain  a clearer  and  fiiller  view  of  the  general  principles 
of  justice  or  equity  which  are  implicitly  assumed  on  one  side 
or  another  in  the  discussion  of  such  demands,  if  we  examine 
the  broad  issue  between  the  individualistic  ideal  of  society, 
approximately  realised  in  modern  civilised  communities,  and 
the  various  socialistic  schemes  that  have  been  constructed  with 
the  view  of  remedpng  its  alleged  injustices.  Such  an  examina- 
tion is  not,  I conceive,  without  interest  even  for  those  economists 
(chiefly  English)  who  aim  at  a purely  scientific  treatment  of  the 
problem  of  distribution.  For  the  conclusions  of  economic 
science  have  always  been  supposed  to  relate  ultimately — how- 
ever qualified  and  supplemented — to  actual  human  beings ; and 
actual  human  beings  will  not  permanently  acquiesce  in  a social 
order  that  common  moral  opinion  condemns  as  unjust. 

32—2 


500 


POLITICAL  ECONOMY 


BOOK  III 


We  may  begin  by  removing  a complication,  by  which  the 
argument  is  sometimes  confused,  arising  from  the  fact  that  the 
individualistic  system  is  in  possession  of  the  field.  Some  per- 
sons, if  the  abolition  of  private  property  were  proposed,  would 
condemn  the  proposal  as  unjust,  merely  because  the  institution 
actually  exists  and  has  always  existed  from  time  immemorial. 
Reflection,  however,  would  probably  convince  them  that  this 
position  is  untenable ; since  they  would  not  deliberately  main- 
tain either  that  no  established  social  order  could  be  unjust  or 
that  if  unjust  it  ought  nevertheless  to  be  perpetual.  That  any 
removal  of  legalised  and  long-standing  social  injustices  should 
be  managed  with  as  much  regard  as  possible  to  the  legitimate 
expectations  of  the  persons  pi’ofiting  by  such  injustices  would 
be  admitted  by  all  reasonable  persons;  and  more  than  this 
would  hardly  be  demanded  by  any  in  the  case  of  such  generally 
approved  changes  as  the  abolition  of  slavery,  serfdom,  absolute 
despotism,  or  oppressive  oligarchical  privileges.  Thus  our 
question  must  clearly  be  whether  the  institution  of  private 
property  is  to  be  regarded,  from  an  abstract  point  of  view,  as 
just  or  unjust.  It  would  not  even  be  contended,  in  the 
parallel  cases  just  mentioned,  that  full  compensation  ought 
to  be  given  to  the  persons  damnified  by  the  changes;  for 
such  compensation  as  would  secure  them  advantages  equal  to 
those  that  they  had  lost  would  often  be  obviously  impossible. 
All  that  can  be  said  generally  is  that  the  compensation  for  the 
disappointment  of  legitimate  expectations  should  be  as  nearly 
adequate  as  the  circumstances  of  the  case  allow. 

On  the  other  hand,  we  may  equally  neglect  the  argument 
that  the  existing  inequalities  in  the  division  of  property  have 
had  their  origin  in  injustice;  even  if  we  grant  that  this  is 
largely  true  in  the  case  of  the  nations  of  modem  Europe.  For  to 
disturb  expectations  based  on  ages  of  orderly  possession,  merely 
’ ,i  order  to  remedy  such  ancient  wongs,  is  not  defensible  on  any 
even  plausible  principles  of  jurisprudence  or  morality:  such  a 
measure  could  only  be  primd  fade  justifiable  if  it  led  to  the 
final  substitution  of  a more  equitable  social  order.  Any  plausible 
attack  on  private  property  must  be  based  on  objections  not  to  its 
origin,  but  to  its  effects ; and  similarly,  if  the  absolute  justice 
of  the  institution  is  to  be  maintained,  it  must  not  be  merely 
because  it  exists,  but  because  it  is  based  on  rational  principles. 


CHAP.  VI  PRINCIPLES  OF  DISTRIBUTIVE  JUSTICE 


501 


I 2.  Let  us  ask,  then,  on  what  grounds  it  can  be  argued  that 
individuals  have  an  inalienable  right  to  private  property,  which 
must  avail  always  and  everywhere  against  all  considerations  of 
equity  or  expediency  that  may  be  urged  in  favour  of  socialistic 
schemes. 

The  most  received  positive  answer  to  this  question  is,  I 
think,  that  which  treats  the  full  right  of  private  property- 
including  the  right  of  freely  disposing  of  it  by  exchange  or 
otherwise — as  an  indispensable  element  of  the  right  to  liberty. 
What  a just  social  order  (it  is  said)  secures  to  individuals  is 
equal  freedom ; whatever  inequalities  in  the  enjoyment  of  the 
material  means  of  happiness  may  actually  result  from  the 
exercise  of  this  freedom  are  perhaps  to  be  deplored  and  volun- 
tarily alleviated,  but  certainly  not  to  be  forcibly  prevented  by 
the  action  of  government.  This  equal  freedom,  then,  is  held 
to  include  the  liberty  of  securing  to  oneself  and  transferring  to 
others  the  sole  use  of  any  material  things  not  hitherto  appro- 
priated. 

Against  this  interpretation  of  social  justice  considerations 
have  often  been  urged  which  may  be  summed  up  in  the  follow- 
ing dilemma.  If,  on  the  one  hand,  we  mean  by  freedom  simply 
the  antithesis  of  physical  coercion,  it  does  not  appear  that  the 
most  perfect  realisation  of  the  “ Freedom  of  each  so  far  as  com- 
“ patible  with  the  Freedom  of  all  others”  would  include  the  estab- 
lishment of  private  property  at  all : it  would  be  strictly  limited 
to  protection  of  the  individual  from  interference  while  actually 
using  any  portion  of  material  wealth,  in  the  same  way  as  he 
would  be  now  protected  while  using  roads,  commons,  &c.  If, 
on  the  other  hand,  we  extend  the  notion  of  equal  freedom  to 
include  equal  opportunity  for  gratifying  desires,  then  it  does 
not  appear  how  equality  of  freedom  can  be  realised  so  far 
as  any  appropriation  is  allowed  which  renders  things  of  the 
kind  appropriated  unattainable,  or  more  difficult  of  attainment, 
by  others.  But,  if  this  be  granted,  since  land  is  a commodity 
of  this  kind — at  least  in  all  but  very  thinly  peopled  -societies — 
and  since  most  other  property  has  come  from  appropriated 
land,  the  supposed  basis  of  the  right  of  private  property  can 
give  but  very  little  support  to  the  institution  in  an  advanced 
stage  of  social  progress. 

Similar  difficulties  arise  if,  instead  of  the  more  general 


502 


POLITICAL  ECONOMY 


BOOK  m 


“ realisation  of  freedom,”  the  special  principle  that  “ every 
“ man  has  a right  to  the  produce  of  his  labour  ” is  proposed 
as  fundamental.  Human  labour  is  obviously  not  the  cause  of 
the  matter  of  any  material  product,  but  only  of  its  form ; there- 
fore, if  a man  is  to  have  right  of  property  in  the  product  he 
must  have  already  been  allowed  to  appropriate  the  material; 
and  this  preliminary  appropriation  will  require  justification. 
To  say  that  he  has  laboured  in  seeking  it  is  a manifest  strain- 
ing of  the  principle  that  we  are  considering;  since,  as  was  before 
said,  land,  the  grand  primary  material  or  natural  instrument 
of  that  agricultural  and  extractive  labour  which  is  the  pre- 
requisite of  all  other  productive  work,  is  not  something  which 
a man  would  have  to  labour  seriously  in  seeking,  if  appropria- 
tion in  land  had  not  already  been  allowed.  And  at  any  rate  the 
first  finder’s  labour  cannot  give  him  a right  to  diminish  the 
opportunities  of  other  seekers.  The  only  mode  of  defending 
private  property,  on  the  basis  of  this  principle,  which  seems 
to  me  at  all  tenable,  is  to  maintain  that  this  inevitable  diminu- 
tion of  opportunities  is  adequately  compensated ; that  the 
appropriation  by  first  comers  of  the  “spontaneous  gifts  of  nature” 
is  not  substantially  unfair  to  those  who  come  after,  because 
though  they  find  the  land  and  its  produce  appropriated,  they 
are  placed  in  a better  position  than  they  would  be  in  if  there 
had  been  no  appropriation.  Ajid  this  is,  I think,  true  if  we 
consider  these  later  comers  in  the  aggregate : it  seems  to  me 
clear  that  existing  labour,  taken  in  the  aggregate,  gains  more 
by  the  results  of  previous  labour,  which  it  finds  accumulated, 
than  it  loses  by  the  appropriation  of  the  land ; especially  since 
a considerable  portion  of  the  utility  of  the  land  itself  must  be 
included  among  these  accumulated  results. 

§ 3.  But  granting  that  the  encroachment  on  the  opportunities 
of  existing  labourers,  involved  in  private  property,  is  adequately 
compensated  to  such  labourers  in  the  aggregate,  it  does  not 
follow  that  the  compensation  is  adequate  in  the  case  of  all 
classes  of  these  labourers.  The  question  still  remains  whether 
the  individualistic  system  of  private  property  and  free  contract 
tends  to  give  particular  labourers  what  their  services  are  fairly 
worth.  And  this  question  is  one  that  cannot  be  avoided  by  the 
advocates  of  this  system : since  the  prevalent  acquiescence 
in  the  results  of  competitive  distribution  is  largely  due  to  the 


CHAP.  VI  PRINCIPLES  OF  DISTRIBUTIVE  JUSTICE 


503 


more  or  less  definite  conviction  that  free  competition  affords 
the  best  realisation  possible,  in  a community  of  human  beings, 
of  the  principle  that  “ every  man  should  have  the  opportunity 
“ of  obtaining  a fair  return  for  his  labour.”  Indeed  we  may  say 
that  political  economy  has  importantly  modified  popular  ethical 
conceptions,  by  defining  the  common  moral  ideal  of  equity  in 
exchange,  where  pre-economic  morality  had  left  it  vague  and 
indeterminate.  The  pre-economic  morality,  whether  of  the 
vulgar  or  of  philosophers,  considered  services  and  products 
as  possessing  “intrinsic  worth”;  and  the  same  conception  still 
governs  the  moral  judgments  of  the  vulgar,  even  in  the  present 
stage  of  economic  culture ; thus,  one  continually  hears  thrifty 
housekeepers  agreeing  in  moral  disapprobation  of  the  present 
race  of  servants,  for  their  persistence  in  demanding  “ more  than 
“ they  ai’e  worth.”  But  reflection  soon  shews  that  the  ordinary 
estimate  of  this  intrinsic  worth  is  merely  dependent  on  custom 
and  habit ; so  that  some  other  standard  of  value  has  to  be 
found,  unless  we  are  prepared  to  condemn  any  deviation  from 
custom  as  extortionate.  And  this  no  one  in  modem  times  is 
prepared  to  do : extended  historical  knowledge  has  shewn  us 
the  wide  variations  of  such  customa  from  place  to  place,  and  the 
changes  that  time  has  continually  wrought  in  them ; and  has 
thus  irresistibly  demonstrated  the  irrationality  of  setting  up  as 
a final  standard  the  custom  of  a.  particular  age  and  c '’'rtyy. 
In  this  difficulty  the  economic  ideal  of  free  competit'  uat- 
been  widely  accepted  as  supplying  the  required  stand.  . 
that  the  price,  which  competition  tends  at  any  time  to  fix  as 
the  market-price  of  any  kind  of  services,  has  been  taken  to  re- 
present the  universal  or  social — and,  therefore,  morally  valid — 
estimate  of  the  “real  worth”  of  such  services. 

But — apart  jfrom  the  exceptional  cases  noticed  in  a previous 
chapter^ — this  view  of  the  market-price  of  services  is  only 
generally  true  with  a very  important  qualification.  The  com- 
petitive remuneration  of  the  individual’s  service  to  society  does 
not  tend  to  correspond  to  his  share  of  the  total  utility  of 
the  kind  of  services  he  renders : what  it  tends  to  measure  is 
merely  its  final  utility, — what  the  community  would  lose  by 

‘ See  c.  ii.  of  this  Book.  Some  of  the  difficulties  in  determining  what  is 
a “fair  contract”  in  particular  cases  will  be  again  discussed  in  the  concluding 
chapter. 


504 


POLITICAL  ECONOMY 


BOOK  in 


the  subtraction  of  a single  individual’s  services  This  distinc- 
tion at  once  explains  and  is  illustrated  by  the  advantage  which 
in  certain  circumstances  a cla^s  of  labourers  may  conceivably 
obtain  by  a combination  which  enables  them  to  sell  their 
services  in  the  aggregate ; for  they  thus  force  society  to  reckon 
the  total  utility  of  this  aggregate,  which  may  be  indefinitely 
greater  than  the  sum  of  the  additional  utilities  of  the  portions 
supplied  by  the  individual  laboureis,  estimated  separately. 
And  when  any  set  of  scantily  paid  workers  complain  of  their 
wages  as  “unfair,”  this  discrepancy  between  total  and  final 
utility  often  seems  to  be  vaguely  present  to  their  minds ; they 
consider  the  great  importance  to  society  of  the  aggregate  of 
the  services  of  their  class,  rather  than  the  comparatively  trifling 
importance  of  the  services  of  any  individual  worker.  Often, 
however,  the  complaint  expresses  simply  the  moral  dissatis- 
fiiction  with  the  proportionment  of  reward  to  final  utility, 
which  arises  when  the  causes  that  influence  the  latter  are 
clearly  understood  and  carefully  considered.  If  a man  is  as 
industrious  to-day  as  he  was  yesterday,  it  seems  hard  that 
he  should  suffer  because  some  unforeseen  decrease  in  the 
demand  for  his  commodity,  or  some  increase  in  the  supply 
of  his  particular  kind  of  labour,  has  reduced  the  final  utility 
of  his  services. 

But  if  we  reject  the  measurement  of  “ worth  ” of  labour  by 
final  utility,  what  other  standard  can  we  take  ? To  determine 
the  reward  of  any  species  of  labour  by  estimating  the  loss  which 
the  subtraction  of  the  whole  aggregate  of  such  labour  would 
inflict  on  society  is  obviously  futile  and  impracticable.  The 
production  of  necessaries  and  that  of  luxuries  would  from  this 
point  of  view  be  incommensurable ; all,  if  permitted,  would 
choose  the  former;  and  no  reason  could  be  given  for  selecting 
some  rather  than  others  for  this  high  function  and  remu- 
neration. 

It  may  perhaps  be.  suggested  that  we  should  estimate 
desert  not  by  the  utility  rendered  to  the  recipient  of  a service, 
but  by  the  effort  of  the  worker.  But  though  this  estimate  is 
certainly  in  harmony  ivith  the  general  notion  of  good  and  ill 
desert,  outside  the  region  of  exchange, — since  the  merit  of 
a deserving  act  is  generally  held  to  lie  in  its  intention  rather 
than  its  result, — the  attempt  to  apply  this  principle  to  the- 


CHAP.  VI  PRINCIPLES  OF  DISTRIBUTIVE  JUSTICE 


505 


distribution  of  social  produce  would  involve  us  in  insuperable 
difficulties.  For  not  only  should  we  have  to  abstain  from  re- 
warding physical  strength  and  quickness,  and  ingenuity,  so  far 
as  these  qualities  are  independent  of  the  agent’s  voluntary 
effort ; but  we  should  find  it  hard  to  shew  why  even  energy  and 
perseverance  are  to  be  remunerated,  unless  we  can  prove  that 
these  qualities  are  not  merely  inherited  natural  gifts : so  that 
the  principle  of  rewarding  desert  would  be  in  danger  of  finding 
no  realisation,  through  our  scrupulous  anxiety  to  realise  it 
exactly* ! On  the  whole,  therefore,  we  seem  led  to  the  con- 
clusion that  the  demand  for  greater  justice  in  distribution  can 
only  be  practically  interpreted  as  a demand  that  differences 
in  remuneration,  due  to  causes  other  than  the  voluntary  exer- 
tions of  the  labourers  remunerated,  should  be  reduced  as  far  as 
possible. 

§ 4.  If  it  be  admitted  that  “ fair  wages  ” may  be  defined, 
for  practical  purposes,  as  “ market  wages  as  they  would  be  under 
“ the  condition  of  the  least  possible  inequality  of  opportunities,” 
it  remains  to  consider  how  such  a condition  is  to  be  secured. 
Now  it  has  certainly  been  the  firm  and  long-cherished  belief  of 
many  adherents  of  the  traditional  political  economy,  that  un- 
restricted freedom  of  action  and  contract  would  tend  to  reduce 
the  actually  inevitable  inequality  of  economic  opportunities 
to  "the  lowest  attainable  minimum, — so  soon  at  any  rate  as 
enlightenment  should  be  sufficiently  diffused  by  means  of 
elementary  education  and  the  spread  of  cheap  means  of  ob- 
taining inforaiation  by  newspapers,  &c.  They  have  believed 
that  labour  thus  becoming  mobile  would  flow  where  the 
demand  for  it — or  its  final  utility — was  greatest,  nearly  as 
easily  and  rapidly  as  water  finds  its  own  level ; so  that  no 
considerable  class  of  persons  would  for  any  length  of  time 
obtain,  as  remuneration  ' for  their  labour,  materially  more  or 
less  than  the  market-price  of  the  most  useful  services  that 
nature  and  their  own  or  others’  labour  and  care  had  qualified 

^ It  may  be  observed  that — for  these  or  other  reasons — some  reconstructors 
of  society  have  discarded  desert  and  adopted  as  their  principle  of  distributive 
justice  either  simple  equality,  or  equality  modified  by  differences  of  need.  In 
the  next  chapter  I have  discussed  briefly  the  communistic  institutions  in  which 
either  of  these  views  finds  its  natural  development ; but  I have  not  thought  it 
fitting  to  introduce  them  here,  as  I do  not  consider  these  principles  to  be  even 
vaguely  implied  in  the  current  notions  of  “just”  or  “fair”  distribution. 


506 


POLITICAL  ECONOMY 


BOOK  ni 


them  to  render.  They  have  admitted  that  very  great  ine- 
qualities of  income,  due  to  inheritance,  would  probably  continue 
to  exist ; but  they  have  thought  it  not  unjust  that  A’s  income 
should  be  augmented  by  the  results  of  his  ancestors’  labour 
and  care,  w^hether  in  the  form  of  material  wealth  or  personal 
aptitudes, — assuming,  of  course,  that  such  augmentation  did 
not  tend  to  make  B’s  income  less  than  it  would  otherwise 
have  been. 

Those  who  hold,  on  the  other  hand,  that  this  view  of  the 
tendencies  of  laisser  faire  is  far  too  optimistic  urge  chiefly 
the  following  objections.  In  the  first  place,  it  is  impossible  to 
prevent  the  effects  of  monopoly,  especially  monopoly  resulting 
fi-om  combination,  fi-om  moditying  and  disturbing  to  an  indefinite 
extent  the  effects  of  free  competition,  without  placing  the  freedom 
of  exchange  and  association  under  restraints  of  a kind  that  the 
advocates  of  laisser  faire  could  not  consistently  recommend. 
And  we  may  add  that  the  attempt  to  impose  such  restraints, 
even  if  made  in  the  style  of  the  most  despotic  of  modem 
governments,  could  never  have  more  than  a verj-  imperfect  and 
unsatisfactory  kind  of  success.  It  could  at  most  only  prevent 
express  and  open  combination ; but,  as  we  have  before  observed*, 
the  effects  of  monopoly  may  be  largely  brought  about  by  tacit 
combination,  which  is  obviously  easier  to  the  rich  few  than  to 
the  many  poor,  and  which,  therefore,  it  would  be  highly  objection- 
able and  invidious  to  favour  indirectly  by  suppressing  the  only 
force  that  could  effective!}'  counteract  it.  On  the  other  hand, 
no  advocate  of  laisser  faire  has  ever  supposed  that  a stmggle 
among  different  combinations  of  producers,  each  aiming  at  its 
own  sectional  interest,  can  have  any  general  tendency  to  bring 
about  a just  distribution  of  produce,  according  to  any  recognised 
view  of  justice. 

There  is,  indeed,  one  way  in  which  the  State  may  effectually 
prevent  the  disadvantageous  results  of  monopoly  Avithout  vexa- 
tious and  inquisitorial  legislation  ; naruely,  by  taking  into  its 
own  hands  a business  that  would  otherwise  fall  into  the  hands  of 
private  monopolists ; since  it  is  thus  enabled  both  to  manage 
the  business  in  the  interests  of  the  community,  and  to  secure  to 
the  public  puree  whatever  profit  it  is  possible  and  expedient  to 

' Book  n.  c.  X. 


CHAP.  VI  PRINCIPLES  OF  DISTRIBUTIVE  JUSTICE. 


507 


make  out  of  it.  In  preceding  chapters  we  have  seen  that  the 
absence  of  any  general  coincidence  between  the  interest  of  the 
monopolist  and  that  of  the  community,  as  regards  the  extent  and 
quality  of  the  commodities  supplied  by  the  former,  constitutes 
a strong  argument  for  this  kind  of  governmental  interference 
from  the  point  of  view  of  production;  we  have  now  to  note 
that  it  is  also  to  be  recommended  as  tending  to  remove  an 
important  source  of  unmerited  inequality  in  distribution.  On 
the  other  side  we  have,  of  course,  to  weigh  carefully  the 
general  drawbacks  of  governmental  as  compared  with  private 
management;  as  these,  in  certain  cases,  might  be  so  great 
as  to  render  the  loss  to  the  community  through  deteriorated 
production  more  important  than  the  gain  in  equity  of  dis- 
tribution. I conceive,  however,  that  no  general  practical 
conclusion  can  be  safely  drawn  from  a comparison  of  these 
opposing  considerations,  as  its  results  are  likely  to  vary  very 
much  both  as  regards  different  countries  and  different  busi- 
nesses in  the  same  country. 

But  further,  the  critics  of  laisser  faire  also  lay  stress  on  the 
growing  element  of  fluctuation  and  uncertainty  in  the  relations 
of  demand  and  supply  of  commodities,  in  consequence  of  the 
more  extensive  organisation  of  industry  through  international 
exchange.  In  this  way,  they  maintain,  the  complexity  of  the 
causes  affecting  any  worker’s  remuneration  tends  to  increase  in 
a far  greater  ratio  than  his  intellectual  resources  for  forecasting 
their  effects;  so  that  the  element  of  “desert”  in  his  gains  and 
losses  of  income  tends  to  become  continually  less  instead  of 
greater.  The  facts  at  present  appear  to  bear  out  this  view; 
though  we  have  hardly  grounds  for  predicting  the  continued 
increase  of  this  fluctuation  and  uncertainty;  rather  it  would 
seem  reasonable  to  regard  this  increase  as  probably  itself 
fluctuating . and  uncertain.  But  sudden  and  considerable 
changes  in  the  earnings  of  particular  classes  of  producers,  due 
to  unforeseen  changes  in  the  demand  for  (or  supply  of)  their 
commodity,  must  be  admitted  to  be  a probably  frequent  in- 
cident of  the  world-wide  extension  of  trade.  From  this  point 
of  view  we  must  admit  that  there  is  some  force  in  what  has 
been  urged  by  protectionists  as  regards  the  tendency  of  pro- 
tection to  keep  the  conditions  of  production  more  stable,  and 
prevent  the  great  fluctuations  in  local  demands  for  labour 


508 


POLITICAL  ECONOMY 


BOOK  III 


which  the  changes  of  widely  extended  trade  are  liable  to  cause. 
On  the  other  hand,  it  must  be  admitted  that  the  same  extension 
of  trade  tends  to  minimise  such  fluctuations  in  supply  and 
price  of  commodities  as  are  due  to  unfavourable  seasons  or  other 
natural  causes : and  if,  in  order  to  retain  this  advantage, 
protection  were  limited  to  articles  which  are  either  but  little 
exposed  to  such  calamities,  or  are  not  necessaries  of  life  or 
industry,  the  security  against  unmerited  fluctuations  in  earnings 
would  be  correspondingly  partial' ; and,  in  any  case,  they 
would  still  be  liable  to  occur  from  internal  developments  of 
trade  and  industry.  And  if  any  government  were  to  attempt 
the  extensive  interference  that  would  be  required  to  make  the 
security  against  unmerited  fluctuations  approximately  complete, 
it  would,  I conceive,  find  an  insuperable  difficulty  in  discrimi- 
nating between'losses  really  inevitable  and  those  that  could  have 
been  prevented  or  largely  reduced  by  foresight,  promptitude, 
and  versatility  in  adapting  action  to  changed  circumstances; 
so  that  governmental  interference,  by  checking  this  spontaneous 
adaptation  of  the  industrial  system  to  the  conditions  of  its  growth, 
would  be  liable  to  impair  seriously  its  productive  efficiency. 
Hence,  though  I think  that  a civilised  community  ought  to  be 
alwa  ys  prepared  to  give  effective  aid,  through  its  government, 
in  any  case  of  acute  and  widespread  distress  caused  to  any 
section  of  its  members  by  changes  in  industry  or  trade,  I hold 
that  such  intervention  ought  to  be  limited  to  these  extreme 
cases;  and  could  never  be  advantageously  employed  as  a 
general  remedy  against  the  divergences  from  equity  in  the 
competitive  distribution  of  producej  that  such  changes  are 
continually  liable  to  cause. 

§ 5.  It  is  more  plausible  to  hold  that  such  a remedy  is  pos- 
sible where  the  changes  are  mainly  in  one  direction,  and  result 
in  an  “ unearned  increment  ” continually  obtained  by  the  owmers 
of  a certain  kind  of  property,  through  its  increasing  scarcity  in 
relation  to  the  demand  for  it.  The  chief  case  of  this  is  land  in 
a country  where  population  is  continually  growdng  thicker.  We 
have  seen,  indeed,  that  the  rise  in  the  value  of  merely  agri- 

1 It  must  also  be  borne  in  mind  that  any  restrictions  on  trade  have  an 
indefinite  but  important  tendency  to  hamper  its  general  development,  and 
diminish  its  efficiency  for  rendering  in  time  of  need  services  that  may  be  required 
from  it. 


CHAP.  VI  PRINCIPLES  OF  DISTRIBUTIVE  JUSTICE 


509 


cultural  land,  which  the  increasing  demand  for  agricultural 
produce  tends  to  bring  about,  may  be  more  than  counteracted  by 
any  kind  of  sudden  and  extensive  improvements  in  production, 
especially  by  the  cheapening  of  transport  and  the  opening  of 
new  channels  of  supply  through  trade  from  abroad.  But  the 
rise  in  the  value  of  land  near  towns,  or  otherwise  situated  con- 
veniently for  the  purpose  either  of  building  or  direct  enjoyment, 
is  not  on  the  whole  affected  by  this  cause.  Hence,  taking  all 
the  varied  utilities  of  land  into  account,  I should  infer  that  the 
aggregate  rental  of  almost  all  existing  civilised  countries  will, 
at  the  close  of  any  period  sufficiently  long  to  allow  for  transient 
oscillations,  have  received  a considerable  “ unearned  incre- 
“ ment  ” ; provided  that  the  existing  tendencies  to  increase  of 
population  continue  to  operate  without  material  change.  And, 
so  far  as  this  increment  can  be  definitely  foreseen  and  measured, 
it  would  certainly  be  an  important  approximation  to  equality 
of  opportunities  if  the  landowners  could  be  prevented  from 
appropriating  it  by  any  legislation  not  othenvise  inequitable. 
It  should,  however,  be  observed  that  if  the  landowner  has  no 
claim  to  the  portion  of  increased  rent  that  is  not  due  to  the 
labour  or  forethought  of  himself  or  his  predecessors  in  owner- 
ship, no  other  individual  member  of  the  community  can  urge 
any  more  claim ; hence  any  attempt  to  secure  any  portion  of 
this  increment  for  the  particular  person  to  whom  he  happens 
to  have  let  his  land,  by  prescribing  “ fair  rents  ” below  the 
market-rate,  cannot  be  justified  on  this  score.  The  equitable 
claim  must  be  taken  to  be  that  of  the  community^ 

I do  not  doubt  the  abstract  validity  of  this  claim : but 
there  appear  to  me  to  be  the  following  grave  objections 
against  any  attempt  to  enforce  it,  in  the  case  of  land  that  has 

1 It  is  sometimes  said  that  Englishmen  in  the  aggregate  have  no  special 
claims — as  against  the  rest  of  the  human  race — to  the  unearned  increment  in 
the  value  of  English  land.  But,  firstly,  this  position  is  not  tenable  ; since  it  is 
mainly  the  development  of  the  English  community  and  the  manner  in  which 
that  community  has  distributed  itself  over  the  country  that  it  inhabits,  which 
has  raised  the  value  of  English  land.  And,  secondly,  whatever  rights  the  rest 
of  the  human  race  may  have  to  the  land  now  held  by  Englishmen  are  in  no 
degree  encroached  upon  by  an  agreement  of  Englishmen  to  hold  their  land  in 
common,  so  long  as  immigration  into  England  remains  as  free  as  before. 
Indeed  it  must  be  obvious  that  the  utility  of  English  land  would  be  more  open 
to  the  enjoyment  of  the  rest  of  the  human  race  after  “nationalisation”  than 
before,  so  long  as  immigration  was  not  restricted. 


510 


POLITICAL  ECONOMY 


BOOK  ni 


once  passed  completely  into  private  ownership ; even  apart 
from  the  inevitable  uncertainty  of  any  practical  conclusion  that 
assumes  the  continuance  of  the  existing  tendencies  to  increase  of 
population.  In  the  first  place,  we  have  every  reason  to  suppose 
that  at  least  a great  part  of  the  future  unearned  increment  of  rent 
is  already  discounted  in  the  present  market-price  of  land : and  it 
would  be  manifestly  unjust  to  mulct  the  particular  persons  who 
keep  their  wealth  in  the  form  of  land,  by  taking  from  them  a 
portion  of  the  market-value  of  their  property.  It  could  only  be 
unearned  additions  to  the  existing  market-value  of  the  land 
that  could  fairly  be  taken  by  the  state,  or  rather  w'hatever 
part  of  such  additions  could  be  shewn  to  be  due  to  unforeseen 
increase  of  rental and  there  would  be  much  diflSculty  in 
separating  this  portion  clearly  from  the  earned  increment.  For 
in  many  cases  the  increased  utility  and  value  of  the  land  would 
be  found  to  be  only  partly  unearned,  as  it  would  be  due 
to  favourable  circumstances  well  turned  to  account ; and  in 
such  cases  I do  not  know  how  we  could  pronounce  what  pro- 
portion of  the  increment  was  to  be  set  down  to  circumstances 
and  what  to  the  insight  and  enterprise  of  the  man  who  skilfully 
availed  himself  of  them.  And  if  a landowner  were  liable  at 
any  time  to  have  to  prove  that  the  additional  value  of  any  part 
of  his  land  was  not  “ unearned,”  in  order  to  prevent  its  being 
taken  from  him  by  an  extra  tax,  the  utilisation  of  land  by 
private  enterprise  would  receive  a severe  check.  Further,  if 
the  state  confiscated  unearned  increment,  justice  would  require 
it  to  give  compensation  for  “ undeserved  decrement  ” : and  this, 
again,  would  involve  an  equal  difficulty  of  valuation,  and  a 
dangerous  withdrawal  of  the  motive  that  a landowner  wffiose 
land  is  declining  in  vahie  now  has  to  exert  himself  to  discover 
some  new  means  of  turning  it  to  account. 

The  only  practicable  way,  I think,  of  attaining  the  end  in 
view  would  be  for  the  state  to  assume  the  ultimate  ownership  of 
land  generally,  and  reward  the  skill  and  enterprise  of  indi- 
viduals in  whose  hands  its  value  increases — according  to  the 
method  before  proposed  in  the  case  of  railways,  &c. — by  allo>ving 
them  to  reap  the  whole  advantage  of  such  increase  for  a certain 
limited  period.  Justice  would  of  course  require  that  adequate 

* As  we  have  noticed  in  an  earlier  part  of  this  work,  a rise  in  the  selling 
valne  of  land  might  be  merely  due  to  a fall  in  the  rate  of  interest. 


CHAP.  VI  PRINCIPLES  OF  DISTRIBUTIVE  JUSTICE 


511 


compensation  should  be  given  to  existing  owners;  and  it  has 
been  urged  that  the  financial  operation  that  would  be  required, 
in  order  to  buy  back  nearly  the  whole  land  of  a fully  occupied 
country  from  its  private  owners,  would  be  beyond  the  resources 
even  of  England ; or  at  least  that  the  community  would  lose  by 
the  increased  rate  of  interest  that  would  have  to  be  paid  more 
than  it  could  possibly  gain  by  unearned  increment.  But  this 
difficulty  may  I conceive  be  avoided,  as  Cliffe  Leslie  suggested^, 
by  deferring  the  time  at  which  the  community  would  enter 
upon  the  ownership  of  the  land.  The  question  rather  is 
whether  the  diminution  in  production  to  be  expected  from 

(1)  the  inertness  and  jobbery  incident  to  public  management, 

(2)  the  inevitable  divergence  of  interests  of  owner  and  lessee 
respectively,  and  (3)  the  loss  of  the  special  satisfactions,  and  any 
special  stimulus  to  labour  and  care,  which  individuals  now 
derive  fi-om  the  sense  of  ownership,  is  not  likely  to  outweigh 
any  gain  in  equity  of  distribution;  even  allowing  for  any 
advantages  that  may  be  fairly  hoped  from  governmental  ad- 
ministration, in  spite  of  its  drawbacks, — e.g.,  from  greater 
economy  in  the  collection  of  rents,  especially  of  small  farms,  the 
more  uniform  application  of  principles  accepted  by  experts,  and 
the  power  of  borrowing  on  better  terms.  I should  not  hesitate 
to  answer  this  question  affirmatively  in  reference  to  most 
existing  communities  at  the  present  time:  though  it  is  quite 
possible  that  the  management  of  governmental  business  may 
in  the  future  be  so  much  improved  as  to  render  it  clearly 
expedient  to  “ nationalise  the  land.” 

§ 6.  In  any  case  the  nationalisation  of  the  land  would 
involve  so  large  a transfer  of  private  capital  to  public  ownership 
that  its  proposal  must  inevitably  raise  the  further  question 
whether  other  portions  of  the  capital  of  individuals  should  not 
be  similarly  nationalised : especially  since — in  recent  years  at 
least — the  loudest  complaint  against  the  existing  individualistic 

* Fortnightly  Review,  October,  1880.  Cliffe  Leslie,  indeed,  held  that  the 
“requirements  of  justice  and  expediency  would  be  satisfied”  if  it  were  simply 
enacted  that  all  land  should  become  public  property  in  the  year  2001.  And 
certainly  the  value  of  what  the  landowners  would  lose  in  this  case  would  be 
comparatively  trifling ; but  I do  not  see  why  even  this  loss  should  be  thrown 
exclusively  on  the  particular  class  of  persons  who  happen  to  own  land,  unless  it 
can  be  shewn  to  be  on  other  grounds  just  that  their  share  of  the  burden  of 
taxation  should  be  somewhat  increased. 


512 


POLITICAL  ECONOMY 


BOOK  III 


system  of  distribution  has  related  to  the  undue  share  of  the 
produce  of  industry  supposed  to  be  obtained  by  “ capital  ” 
in  its  competition  with  “ labour.”  This  complaint,  as  usually 
formulated,  fails  to  discriminate  between  the  two  elements  of 
the  yield  of  capital  which  we  distinguished  in  Book  II.  under 
the  terms  “ interest  ” and  “ wages  of  management.”  .According 
to  the  view  adopted  in  the  present  treatise,  the  causes  that 
determine  the  amount  of  these  two  elements  of  “ profit  ” are 
so  fundamentally  different,  that  it  is  necessary  to  consider  the 
present  question  with  regard  to  each  separately. 

As  regards  “ wages  of  management,”  we  certainly  found 
reason  to  believe  that  large  capitalists  engaged  in  business 
obtain  on  the  average  a larger  proportional  remuneration  for 
their  labour  than  any  other  class  of  workers.  As  we  saw*,  this 
is  implied  in  the  assumption,  commonly  made  both  by  economists 
and  by  practical  men,  that  at  least  an  equal  percentage  of  profit 
is  earned  by  such  capitalists ; since  the  labour  of  management 
certainly  does  not  increase  in  simple  direct  proportion  to  the 
amount  of  capital  managed.  At  the  same  time,  the  question  how 
far  these  extra  earnings  are  to  be  regarded  as  unfair  is  not  one 
that  admits  of  a simple  and  decisive  answer;  since — where 
no  combination  or  other  monopoly  comes  in — they  must  be 
caused  by  the  superior  productiveness  of  businesses  on  a large 
scale  carried  on  by  individual  capitalists ; and  this  greater  pro- 
ductiveness, again,  must  be  chiefly  due  to  the  keener  concern 
and  more  strenuous  activity  which  men  in  general  shew  in 
the  management  of  affairs  of  which  they  have  the  sole  control 
and  reap  the  sole  profit.  On  the  other  hand, — since  the  amount 
of  the  employers’  extra  gains  is  due  not  to  the  scarcity  of 
possible  employers  personally  qualified  and  wiihng  to  perform 
equally  productive  work,  but  to  the  scarcity  of  persons  who 
being  thus  qualified  and  willing  are  able  to  obtain  capital, — 
it  can  hardly  be  expected  that  other  members  of  the  com- 
munity should  acquiesce  patiently  in  this  large  remuneration 
of  the  labour  of  capitalist  employers,  so  far  as  it  admits  of  being 
removed  by  associated  action. 

Hence  I should  refrain  from  co  ndemning  as  unfair  the  efforts 
of  labourers  to  reduce  the  profits  of  employers  by  combinations 


’ Cf.  ante,  Book  ir.  c.  ix. 


CHAP.  VI 


PRINCIPLES  OF  DISTRIBUTIVE  JUSTICE 


513 


to  raise  wages : though,  as  has  been  already  said,  the  principle 
on  which  such  combinations  proceed  is  one  which  could  not 
conceivably  be  employed  as  a general  basis  for  an  equitable 
distribution  of  produce. 

Hence,  again,  if  any  reduction  in  the  extra  earnings  of 
capitalist  employers  can  be  effected  by  improvements  in  the 
management  of  associated  capital,  the  resulting  gain  in  aggre- 
gate produce  tends  to  be  accompanied  by  a greater  approxima- 
tion to  equality  of  opportunities — at  least  as  among  owners  of 
different  amounts  of  capital.  And  fi-om  this  point  of  view  any 
successful  and  profitable  extension  of  governmental  manage- 
ment of  industry — which  we  may  regard  as  a peculiar  species  of 
associative  management — would  seem  to  be  doubly  desirable. 

But  further : we  saw  that  it  is  not  only  the  large  capitalist 
whose  services  (as  employer)  tend  to  be  at  a scarcity  price 
as  compared  with  those  of  smaller  capitalists ; advantages 
similar  in  kind  are  possessed  in  various  degrees  by  capitalists,  or 
rather  by  the  children  of  capitalists,  of  lower  grades  in  the  scale 
of  wealth — including  those  who  possess  ‘‘  personal  capital  ” in 
the  knowledge  and  skill  acquired  by  industrial  or  professional 
training.  These  advantages  are  realised,  whenever  the  differ- 
ences in  the  average  remuneration  of  different  grades  of  labour 
are  in  excess  of  what  would  amount  to  ordinary  interest  on  the 
additional  outlay  required  for  sustenance  during  an  additional 
period  of  education,  and  for  the  greater  cost  of  the  education 
itself  Here  again  we  may  say  that  so  far  as  the  scarcities 
which  cause  these  differences  can  be  diminished  or  removed  by 
governmental  action  that  is  socially  profitable — as  {e.g.)  by  a 
system  of  free  or  cheapened  education  of  which  the  cost  would 
be  repaid  to  the  community  in  the  increased  productiveness  of 
labour — the  tendency  of  such  action  to  realise  greater  equity 
in  distribution  may  be  admitted  as  an  additional  argument  in 
its  favour. 

But  even  if  such  interference  could  be  carried  to  the  point  at 
which  there  were  no  differences  in  the  remuneration  of  different 
kinds  of  labour  except  such  as  represented  ordinary  interest  on 
different  outlays  of  capital,  it  might  still  be  argued  that  the 
payment  of  interest  at  all  on  capital  is  itself  a removable  cause 
of  inequality  of  opportunities ; and  that,  therefore,  its  removal 
would  bring  about  a more  truly  just  distribution  of  produce. 

33 


S.  P.  E. 


614 


POLITICAL  ECONOMY 


BOOK  III 


The  grounds  on  which  this  has  been  maintained  by  modem 
socialists  are  deserving  of  careful  examination  ; as  they  have 
not,  I think,  been  adequately  apprehended  by  the  individualist 
writers  who  have  replied  to  them*.  It  may  be  observed,  in  the 
first  place,  that  if  the  market-rate  of  interest  is  attacked  at  all, 
from  the  point  of  view  of  abstract  justice,  there  is  no  reason  for 
stopping  short  of  total  abolition;  it  would  be  quite  arbitrary  to 
select  any  particular  rate  of  interest  as  ideally  more  ju.st  than 
any  other.  On  behalf  of  total  abolition,  the  contention  of 
the  socialist  is  that  “ the  full  produce  of  labour  ought  to  go 
“ to  the  labourer.”  To  this  the  individualist  sometimes  thinks 
it  sufficient  to  reply  by  urging  the  helpless  state  in  which 
labour  would  be  placed  if  deprived  of  the  imstruments  of 
all  kinds  which  constitute  the  main  part  of  the  real  capital  of 
the  community.  But  this  answer  is  not  really  to  the  point ; as 
the  socialist  can  effectively  rejoin  that  doubtless  labour  requires 
instruments,  and  the  labour  of  making  in.struments  should  be 
remunerated  as  fully  as  any  other  kind  of  labour  ; but  that 
interest  is  certainly  not  the  remuneration  for  this  labour ; being 
in  fact,  as  economists  of  the  laisser  faire  school  have  been 
especially  careful  to  explain,  payment  for  what  Senior  and 
others  have  called  the  “ abstinence  ” of  the  capitalist ; or,  as  I 
have  preferred  to  say,  for  the  delay  that  he  allows  to  intervene 
between  the  application  of  the  labour  and  the  consumption  of 
its  product.  The  real  question,  therefore,  is  not  whether  instru- 
ments ought  to  be  made  but  whether  it  is  fair  that  this  delay 
involved  in  making  them  should  have  to  be  paid  for.  On  the 
individualist  side  it  is  urged  with  truth  that  labour  has  gained 
on  the  whole  by  the  delay  to  a far  greater  extent  than  is  repre- 
sented by  the  intere.st  paid.  But  the  socialist  can  answer  that 
the  private  ownership  of  what  I have  called  “ producei's’  ” wealth 
is  not  a necessary  condition  of  this  gain.  He  can  urge  that  if 
the  community  once  for  all  took  possession  of  the  producei's’ 
capital  that  is  now  in  private  hands,  all  future  accumulations  of 
such  ca])ital  might  go  on  just  as  they  would  do  on  the  existing 
svstem,  assuming  that  the  community  would  consent  to  devote 
as  much  labour  as  at  present  to  the  production  of  remote  utili- 

* I ought  to  say,  on  the  other  hand,  that  the  socialist  arguments  that  I have 
seen  have  been  wanting  in  clearness  of  distinction  between  interest  and  that 
extra  profit  of  employing  capitalists  that  we  have  just  been  discussing. 


CHAP.  VI  PRINCIPLES  OF  DISTRIBUTIVE  JUSTICE 


515 


ties ; so  that,  even  supposing  the  present  interest  to  be  paid  to 
the  dispossessed  owners  of  the  capital  already  accumulated,  the 
labourers  might  still  divide  among  themselves  the  increment  of 
produce  continually  accruing  from  new  accumulations  of  capital. 
In  short,  all  the  “ saving”  required  could  be  done  without  being 
paid  for,  if  it  were  done  by  the  community  previous  to  the 
division  of  the  produce. 

It  must  be  admitted,  I think,  first,  that  the  social  accu  * 1 
tion  of  instruments  might  conceivably  be  carried  on  b'  th 
community,  and  without  any  payment  of  interest ; and,  secondly, 
that  there  is  no  principle  of  abstract  equity  which  renders  it 
morally  obligatory  to  carry  it  on  as  at  present,  by  first  allowing 
individuals  to  divide  up  the  whole  produce  of  social  industry, 
and  then  promising  them  future  payments  if  they  will  allow  a 
portion  of  their  shai-es  to  take  the  form  of  fresh  instruments. 
And  if  the  former  method  of  providing  for  the  progress  of 
industry  could  be  trusted  to  work,  without  any  counterbalancing 
drawbacks,  the  perpetuation  of  the  inequalities  of  distribution 
that  we  see  to  be  inevitably  bound  up  with  the  existing  system 
would  be  difficult  to  reconcile  with  our  common  sense  of 
justice  as  I have  been  led  to  interpret  ith  Nor  do  I think 
that  the  difficulties  of  transition  from  the  one  system  to  the 
other,  or  the  inevitable  disappointment  of  expectations  involved 
in  it,  would  necessarily  be  more  intense — though  of  course 
they  would  be  indefinitely  greater  in  extent — than  those  which 
in  the  course  of  modem  history  have  actually  attended  the 
abolition  of  slavery  in  our  colonies,  of  serfdom  in  Russia,  or  of 
oppressive  feudal  privileges  in  other  European  States.  I do  not 
mean  to  imply  that  the  transition  to  socialism  is  to  be  classed 
with  the  changes  just  mentioned,  even  if  it  be  regarded  merely 
as  a distant  stage  of  social  progi'ess ; but  I conceive  that  in 
urging  the  reasons  for  not  so  classing  it  we  have  to  pass — as 
in  the  case  of  the  remedies  for  inequality  of  opportunity  that 

' Even  assuming,  as  is  usually  done,  that  it  would  be  rtecessary  for  the 
complete  realisation  of  the  socialistic  scheme  to  refuse  to  enforce  private  con- 
tracts for  lending  of  money  at  interest,  I cannot  regard  this  as  a fundamental 
objection  on  the  ground  of  justice.  If  the  interference  with  freedom  involved 
in  appropriation  of  land  to  individuals  can — as  I hold — only  be  justified  by  the 
gain  to  production  that  it  has  caused,  I do  not  see  why  this  other  interference 
should  not  equally  be  justified  if  without  impairing  production  it  tended  to 
bring  about  an  adequate  improvement  in  distribution. 


33-2 


616 


POLITICAL  ECONOMY 


BOOK  ni 


we  have  before  discussed — from  the  point  of  view  of  distribu- 
tion to  that  of  production.  I object  to  socialism  not  because 
li.  would  divide  the  produce  of  industry  badly,  but  because  it 
would  have  so  much  less  to  divide.  But  when  this  objection  is 
urged,  the  controversy  is  necessarily  shifted  from  the  tribunal 
of  abstract  justice  to  one  where  utilitarian  or,  as  I have  called 
them,  “ economic  ” considerations  are  taken  as  decisive. 


CHAPTER  VII. 


ECONOMIC  DISTRIBUTION. 

§ 1.  In  the  preceding  chapter  we  have  considered  the  question 
of  governmental  interference  with  a view  to  a more  equitable 
distribution  of  produce.  I now  pass  to  consider  how  far  such 
interference  is  desirable  on  economic  grounds : that  is,  as  was 
explained  in  the  first  chapter  of  this  Book,  in  order  that  a 
greater  aggregate  of  utility  or  satisfaction  may  be  obtained 
from  the  produce  of  the  labour  and  capital  of  the  community. 
It  may  appear  that  there  is  no  material  discrepancy  between 
the  practical  conclusions  to  which  we  are  led  by  reasoning  from 
either  point  of  view : but  the  lines  of  reasoning  themselves  are 
widely  different.  So  far  as  we  aim  at  realising  justice  or 
equity — according  to  the  interpretation  of  these  notions  that 
has  been  chiefly  discussed  in  the  preceding  chapter — the 
proportionment  of  the  individual’s  share  of  produce  to  his 
deserts  is  the  primary  end  to  be  sought,  and  the  removal  of 
inequalities  only  as  a means  to  this ; that  is,  only  so  far  as 
these  inequalities  are  due  to  other  causes  than-  the  different 
worth  of  the  exertions  unequally  remunerated.  Whereas  from 
a purely  economic  point  of  view  the  relation  of  desert  and 
equality  is  the  reverse;  a more  equal  distribution  is — subject 
to  certain  important  qualifications  that  will  be  presently  stated 
— more  economic : and  though  the  principle  of  rewarding  desert 
remains,  in  my  view,  paramount,  it  is  rather  as  a stimulus 
indispensable  to  the  most  economic  production,  which  thus 
presents  itself  as  a condition  by  which  all  efforts  to  make 
distribution  more  economic  ought  to  be  confined.  The  dis- 
tinction is  perhaps  rather  formal  than  material ; but  it  is 


518 


POLITICAL  ECONOMY 


BOOK  III 


necessary  to  make  it  clear,  in  order  that  the  relation  of  the 
present  to  the  preceding  chapter  may  be  understood. 

The  pi'imd  facie  ground,  then,  on  which  the  interference 
(d  government  with  the  distribution  of  produce  that  results 
■ 'om  the  individualistic  oi'ganisation  of  industry  appears  eco- 
nomically desirable,  lies  in  the  very  great  inequalities  in  income 
to  which  this  organisation  leads.  The  common  sense  of  man- 
kind, in  considering  these  inequalities,  implicitly  adopts,  as 
I conceive,  two  propositions  laid  down  by  Bentham  as  to  the 
relation  of  wealth  to  happiness : namely,  ( 1 ) that  an  increase  of 
wealth  is — speaking  broadly  and  generally — productive  of  an 
increase  of  happiness  to  its  possessor;  and  (2)  that  the  resulting 
increase  of  happiness  is  not  simply  proportional  to  the  increase 
of  wealth,  but  stands  in  a decreasing  ratio  to  it. 

The  former  of  these  propositions  will  be  thought  by  many 
to  need  no  support ; considering  the  vast  and  varied  aggregate 
of  widely  felt  desires  which  wealth  supplies  the  means  of  grati- 
fying. Still  it  is  notorious  that  it  has  been  roundly  denied  by 
a large  number  of  thoughtful  persons.  Indeed,  as  was  before  ob- 
served’, even  the  author  of  the  Wealth  of  Nations  has  expressed 
himself  with  remarkable  decision  in  the  opposite  sense.  I think, 
however,  that  the  .sentimental  optimism  which  held  that  happi- 
ness is  equally  distributed  between  the  palace  and  the  cottage — 
with  a preference,  if  at  all,  in  favour  of  the  cottage — has  wellnigh 
vanished  before  a more  careful  and  impartial  study  of  the  facts  of 
social  existence.  At  the  present  day,  even  tliose  who  most  warmly 
assail  political  economy,  on  the  gi'ound  of  the  exaggerated  im- 
portance which  it  attaches  to  wealth,  do  not  usually  go  so  far 
as  to  maintain  that  increase  of  wealth  is  not  important  for  the 
individual  and  for  society  so  far  as  it  can  be  obtained  without 
any  sacrifice  of  other  sources  of  happiness.  It  is,  indeed,  probable 
that  there  are  many  rich  individuals  who  would  be  happier  on 
the  whole  if  they  were  poorer ; and,  again,  that  the  immediate 
effect  of  a sudden  and  considerable  increase  in  the  wealtli 
of  certain  sections  of  the  poorer  classes  might  be  a dimi- 
nution of  happiness,  on  account  of  the  increase  of  pernicious 
indulgences  tliat  it  would  bring  with  it.  But,  making  all 
allowance  for  such  partial  or  transitoiy  exceptions,  it  renuiins 


* Introduction,  c.  ii.  § H. 


CHAP.  VII 


ECONOMIC  DISTRIBUTION 


519 


true  that  the  practical  reasonings  of  the  great  mass  of  mankind 
— whether  for  themselves  or  for  others  in  whom  they  are  indi- 
vidually interested — proceed  on  the  assumption  that  it  is  an 
advantage  to  be  richer;  and,  further,  that  the  judgment  of  the 
most  highly  cultivated,  scrupulously  moral,  and  sincerely  reli- 
gious persons — as  expressed  in  their  conduct— does  not  diverge 
materially  from  that  of  the  vulgar  in  the  matter.  The  elite 
certainly  disagree  very  much  with  the  vulgar  as  to  the  real 
value  of  particular  purchasable  commodities ; but  they  do  not 
practically  doubt  that  additional  control  over  purchasable 
commodities  generally  is  an  important  gain  to  an  individual 
who  obtains  it.  A man  who  chose  poverty  for  himself,  except 
for  some  manifest  special  and  unpurchasable  advantage,  or 
at  the  manifest  call  of  some  special  duty,  would  be  deemed 
eccentric : a man  who  chose  it  for  his  wife  and  children  would 
be  generally  thought  to  deserve  a harsher  name. 

On  the  other  hand,  few,  I conceive,  would  estimate  the 
advantage  of  additional  wealth  so  highly  as  even  to  dispute 
the  seconil  of  Bentham’s  two  propositions  above  stated,  and  to 
contend  that  on  the  average  the  amount  of  satisfection  derived 
from  wealth  tends  to  increase  in  simple  proportion  to  the  in- 
crease of  the  wealth  itself  And  fi’om  the  two  propositions 
taken  together  the  obvious  conclusion  is  that  the  more  any 
society  approximates  to  equality  in  the  distribution  of  vveailh 
among  its  members,  the  greater  on  the  whole  is  the  aggi’egate 
of  satisfactions  which  the  society  in  question  derives  from  the 
wealth  that  it  possesses. 

Keliection,  however,  shews  that  this  inference  is  only  legiti- 
mate under  certain  conditions  : namely,  that  the  total  amount  o 
produce  to  be  divided,  and  the  number  of  persons  among  whoie 
it  is  to  be  divided,  remain  unaffected  by  the  change  in  dis- 
tribution ; and,  further,  that  the  change  has  no  tendency  to 
diminish  the  happiness  of  the  community  so  tar  as  it  is  derived 
from  other  sources  than  increase  of  wealth.  These  conditions 
require  careful  examination ; since  it  will  be  found  that  under 
each  of  the.se  heads  important,  if  not  decisive,  considerations 
Tnay  be  urged  in  favour  of  the  existing  inequalities  of  distri- 
bution. 

§ 2.  Ill  the  hrst  place,  it  is  conceivable  that  a greater 
eipiality  in  the  distribution  of  produce  would  lead  iiltim-ite'-. 


520 


POLITICAL  ECONOMY 


BOOK  III 


to  a reduction  in  the  total  amount  to  be  distributed,  in  con- 
sequence of  a general  preference  of  leisure  to  the  results  of 
labour  on  the  part  of  the  classes  whose  shares  of  produce  had 
increased.  It  may  be  said  that  we  should  have  no  ground  for 
supposing  in  this  case  a diminution  in  average  happiness  cor- 
responding to  the  diminution  in  wealth  ; since,  by  supposition, 
the  increase  of  leisure  would  be  chosen  as  likely  to  give  more 
happiness  than  the  increase  of  wealth.  There  are,  however, 
two  considerations  of  some  Aveight  which  may  lead  us  to  doubt 
the  soundness  of  this  primd  facie  view.  In  the  first  place, 
there  is  a wide-spread  opinion  among  observant  persons  that 
human  beings  generally  have  a tendency  to  overvalue  leisure 
as  a source  of  happiness.  All  those  who  maintain  that  riches 
frequently  fail  to  bring  an  increase  of  happiness  to  their  posses- 
sors commonly  lay  great  stress  on  this  tendency;  they  argue 
that  the  rich  miss  happiness  largely  through  an  undue  pui-suit 
of  passive  pleasures  and  amusements,  to  the  neglect  of  those 
that  may  be  deiived  from  strenuous  activity  for  a serious  end. 
I am  myself  disposed  to  take  this  view : and  I should  regard 
it  as  highly  probable  that  a sudden  and  large  increase  of  the 
income  of  the  poorer  classes  might  cause  them  to  fall  exten- 
sively into  similar  imprudence ; while  the  removal  of  the 
stimulating  examples  which  the  lives  of  the  rich  now  offer  or 
the  varied  satisfactions  to  be  derived  from  abundant  Avealth 
Avould  probably  tend  still  further  to  promote  general  sloth.  But 
again,  even  supposing  that  the  diminution  in  their  labour  led 
immediately  to  a real  inci’ease  of  happiness  through  increased 
leisure,  there  Avould  still  remain  the  objection  that  it  might 
diminish  the  provision  against  social  calamities  causing  gi’eat 
and  sudden  loss  of  wealth,  Avhich  is  noAv  supplied  by  the 
superfluous  consumption  of  the  rich.  Such  calamities — Avhether 
due  to  natural  causes,  or  to  Avar — may  noAv  be  met  by  a re- 
striction of  the  luxurious  expenditure  of  the  richer  classes 
generally — through  A'oluntary  contributions  and  increased  taxa- 
tion combined — by  Avhich  the  extreme  distress  that  they  Avould 
otherAvise  cause  to  the  poorer  classes  may  be  mitigated.  But 
a community  that  had  exchanged  its  superfluous  Avealth  for 
gi'eater  leisure  Avould  haA^e  lost  this  resource ; and  its  additional 
power  of  increasing  its  labour  Avould  be  an  inadequate  substitute, 
OAving  to  the  difficulty  of  making  it  promptly  effective. 


CHAP.  VII 


ECONOMIC  DISTRIBUTION 


521 


But  again,  even  supposing  that  the  equalisation  of  shares 
did  not  diminish  the  average  activity  of  the  workers  of  the 
communitv,  it  might  still  diminish  the  efficiency  of  labour 
through  its  effect  on  the  accumulation  of  capital.  At  present, 
the  greatest  part  of  the  saving,  by  which  the  stock  of  instru- 
ments in  the  country  is  continually  increased  and  the  benefits 
of  invention  realised,  is  made  from  the  larger  incomes  of  the 
rich : and  consequently  there  is  a considerable  danger  that  an 
equalisation  of  incomes  would  lead  to  a decrease  in  the  propor- 
tion of  the  aggregate  income  of  the  community  thus  converted 
into  capitaU. 

This  argument,  as  just  stated,  assumes  the  continuance  of 
the  present  individualistic  organisation  of  industry : since  under 
a socialistic  system  the  accumulation  of  capital  would  be  con- 
trolled by  the  government  and  would  be  independent  of  the 
savings  of  individuals.  But  governments  have  hitherto  shewn 
themselves  timid  and  unenterprising  in  availing  themselves  of 
the  results  of  invention  ; and  there  seems  no  reason  to  suppose 
that  a socialistic  government  would  be  specially  bold  in  trying 
expensive  experiments. 

Again,  as  we  have  already  seen,  experience  would  lead  us  to 
conclude  that,  even  supposing  the  aggregate  of  accumulation 
not  to  be  diminished  by  a more  equal  distribution  of  produce, 
still  a quantum  of  capital  made  up  of  a number  of  small  portions 
in  different  ownership  is  less  likely  to  be  productively  adminis- 
tered than  an  equal  quantum  divided  among  a few  wealthy 
owners.  The  small  savings  might  no  doubt  be  massed  by  asso- 
ciation in  amounts  sufficient!}’  large  for  the  organisation  of 
businesses  on  any  scale  that  might  be  found  most  economically 
expedient ; but  theory  and  experience  combine  to  shew  tliat 
the  keenness  of  concern,  and  the  power  of  jironqit  and  un- 
fettered action,  that  private  ownership  gives  would  still  be 
Avanting  to  the  necessarily  .salaried  and  controlled  managers  of 
these  businesses.  Unless  these  advantages  can  be  compensated, 

* It  may  be  observed  too  that  the  tentative  and  hazardous  investments, 
which  liave  hitherto  been  necessary  for  the  progress  of  industry  through 
invention,  are  more  appropriately  made  out  of  the  savings  of  persons  who  suffer 
comparatively  little  from  the  partial  or  even  total  loss  of  their  capital.  I fear, 
however,  that  this  possible  advantage  of  the  .existing  unequal  distribution  of 
wealth  is  but  imperfectly  realised  at  present. 


522 


POLITICAL  ECONOMY 


BOOK  III 


to  a greater  extent  than  they  have  hitherto  been,  eitlier  by  some 
future  development  of  the  system  of  co-operative  production  or 
otherwise,  a more  equal  distribution  of  capital  must  necessarily 
be  attended  with  a decrease  in  its  productive  efficiency.  And 
this  conclusion  holds  equally  whether  we  suppose  the  existing 
individualistic  organisation  of  society  to  continue  as  at  present, 
or  to  be  wholly  or  partially  superseded  by  socialistic  institu- 
tions ; so  far  as  we  have  no  ground  for  regarding  governmental 
management  of  capital  as  likely  to  be  superior  on  the  whole  to 
average  joint-stock  management  in  the  points  in  which  the  latter 
is  less  efficient  than  management  by  private  owners. 

The  objections  above  stated  would  apply  with  increased 
force,  if  the  increase  through  equalisation  of  the  incomes  of  the 
poorer  classes  should  cause  the  population  to  increase  at  a more 
rapid  rate  than  at  present ; so  that  ultimately  the  increment  of 
an  average  worker’s  share  would  be  partly  spent  in  supporting  a 
larger  number  of  children,  and  pai-tly  reduced  through  the  de- 
crease in  the  efficiency  of  the  more  crowded  labour'.  It  would 
be  rash,  indeed,  to  predict  confidently  that  this  would  bi*  the 
effect  of  equalisation ; but  it  would  be  still  more  rash  to  ignore 
the  risk  of  it. 

Finally,  we  have  to  consider  the  importance  of  the  .six-ial 
functions — over  and  abo\  e the  economic  function  of  enqiloying 
capital — which  the  wealthier  members  of  a communit}'  actually 
fulfil,  however  imperfectly  and  with  whatever  waste  of  re.sources, 
in  their  customary  enq)loyment  of  their  leisure  and  their  lux- 
urious ex])enditure.  I <lo  not  now  refer  mainly  to  the  function 
of  governing — including  that  of  giving  suggestions  and  admoni- 
tions to  government — since  I take  it  to  be  a disputeil  question 
of  politics  whether  these  functions  in  the  jiresent  stage  of  .social 
develojunent  may  not  be  better  fulfilled  by  salaried  officials  and 
professional  journalists,  6sc.  I refer  rather  to  what  may  be  com- 
prehensive 1}'  though  ^■aguely  designated  as  the  function  of  main- 
taining and  developing  knowledge  and  culture.  1 distinguish 
knowledge  from  culture,  though  the  latter  notion  would  naturally 

' Even  apart  from  tlie  dangers  of  diminishing  resources  against  unforeseen 
calamity  and  checkiug  the  accumulation  of  capital,  it  seems  at  least  highly 
doubtful  whether  a mere  incre.ase  in  the  number  of  human  beings  living  as  an 
average  unskilled  labourer  lives  in  England  can  be  regarded  as  involving  a 
material  increase  in  the  quantum  of  human  happiness. 


CHAP.  VII 


ECONOMIC  DISTRIBUTION 


523 


include  the  former,  because  of  the  peculiar  economic  importance 
of  the  progress  of  science,  as  the  source  of  inventions  that 
increase  the  efficiency  of  labour.  This  progi-ess  in  past  ages  has 
been  largely  due  to  the  unremunerated  intellectual  activity, 
assisted  by  the  liberal  expenditure,  gf  rich  and  leisured  jiersons. 
At  the  same  time,  it  is  of  course  conceivable  that  the  develop-, 
ment  of  knowledge  should  be  adequately  carried  on — as  it  is 
chiefly  in  Germany  at  the  present  time — by  persons  salaried  and 
provided  with  instruments  at  the  public  expense.  And  the  con- 
nexion between  scientific  discoveries  and  technical  inventions  is 
now  so  firmly  established  in  the  popular  mind,  that  probably 
even  a government  controlled  entirely  by  persons  of  small 
incomes  would  not  refuse  the  funds  requisite  for  the  support  of 
the  study  of  physical  science  in  universities,  academies,  &c. 
The  case  is  different  with  such  knowledge  as  has  no  obvious 
practical  utility,  and  is,  therefore,  only  likely  to  be  valued  by 
persons  susceptible  to  the  gratifications  of  disinterested  curiosity. 
Such  knowledge  must  be  ranked,  as  a source  of  elevated  and 
refined  gratification,  along  with  literature,  art,  intellectual 
conversation,  and  the  contemplation  of  natural  beauty.  The 
capacities  for  deriving  enjoyment  from  these  sources  constitute 
what  we  call  culture ; they  are  generally  regarded  by  persons 
possessed  of  them  as  supplying  a most  important  element  in  the 
happiness  of  life  ; while,  at  the  same  time,  so  far  as  we  can  judge 
fi’Oin  past  experience,  it  is  only  in  a society  of  comparatively 
rich  and  leisured  persons  that  these  capacities — and,  still  more, 
the  faculties  of  producing  excellent  works  in  literature  and  art — 
are  likely  to  be  developed  and  transmitted  in  any  high  degree. 

There  seems,  therefore,  to  be  a serious  danger  that  a 
thoroughgoing  equalisation  of  wealth  among  the  members  of  a 
modern  civilised  community  would  have  a tendency  to  check 
the  growth  of  culture  in  the  community.  The  amount  of 
loss  to  human  happiness  that  is  to  be  apju’eliended  from  this 
effect  is  difficult  to  estimate  ; especially  since  those  who  estimate 
it  most  highly  would  jiroliably  refuse  to  allow  the  question 
to  be  decided  by  a mere  consideration  of  the  actual  amount 
of  happine.ss  that  culture  has  hitherto  given.  The}'  have  a 
conviction,  for  which  they  could  not  give  an  empirical  justifica- 
tion, that  a diffusion  of  culture  may  be  expected  in  the  future 
which  has  no  parallel  in  the  past;  and  that  any  .social  changes 


524 


POLITICAL  ECONOMY 


BOOK  III 


which  cripple  its  development,  however  beneficent  they  may  be 
in  other  respects,  may  involve  a loss  to  humanity  in  the  ag- 
gregate which,  if  we  look  sufficiently  far  forward,  seems  quite 
immeasurable  in  extent. 

There  are,  in  fact,  several  distinct  jiractical  questions  sug- 
gested by  the  connexion  which  history  shews  between  the  de- 
velopment of  culture  and  the  existence  of  a rich  and  leisured 
class  in  a community  of  human  beings.  We  may  (1)  balance 
the  additional  happiness  gained  to  the  lives  of  the  few  rich  by 
culture  against  the  additional  happiness  that  might  be  enjoyed 
by  the  poor  if  wealth  were  more  equally  distributed ; or  (2)  we 
may  consider  how  far  whatever  happiness  is  derived  from  culture 
by  the  many  poor  depends  at  any  given  time  on  the  maintenance 
of  a higher  kind  of  culture  among  the  few  rich ; or  (3)  we  may 
endeavour  to  forecast  the  prospective  addition  to  happiness 
when  culture  shall  have  become  more  diffused,  which  would  be 
endangered  b}"  any  injury  to  its  present  development  among 
the  limited  class  who  now  have  any  considerable  share  in  it. 
From  each  of  these  three  distinct  points  of  view  arguments  of 
a' certain  force  ma}"  be  drawn  in  favour  of  the  present  inequality 
in  the  distribution  of  wealth. 

Any  estimate  of  the  force  of  the  considemtions  above  given 
must  necessarily  be  vague ; but  it  seems  clear  that  they  apply 
far  more  strongly  against  any  sudden  sweejnng  equalisation 
than  they  do  against  a more  slow'  and  gradual  movement  to- 
wards this  result, — accompanied  (as  it  naturally  would  be)  by 
an  iuqnovement  in  the  average  intellectual  condition  of  the 
classes  w'ho  w'ould  benefit  pecuniarily  by  the  equalisation. 

I have  not  yet  mentioned  one  important  point,  namely,  the 
loss  of  the  specially  keen  stimulus  to  socially  useful  exeition 
w'hich  the  ^irospect  of  obtaining  ample  wealth  by  business  talent, 
mechanical  invention,  or  ])rofessional  or  artistic  skill,  now  gives 
to  an  important  minority  of  jiersons.  Almost  any  method  of 
introducing  greater  equality  of  incomes  would  involve  some 
loss  of, this  kind:  but  the  extent  of  such  loss  would  depend 
greatlv  on  the  manner  in  wffiich  the  equalisation  was  carried 
out, — W'hich  w'e  will  now'  proceed  to  consider. 

§ 3.  The  most  extreme  means  w'hich  have  been  proposed 
for  equalising  distribution  are  the  systems  commonly  designated 
by  the  terms  “ Communism  ” and  “ Socialism  ” ; which  involve 


CHAT.  VII 


ECONOMIC  DISTRIBUTION 


525 


either  the  almost  entire  abolition  of  private  jiroperty,  or  its 
restriction  to  consumers’  wealth.  These  terms,  however,  and 
especially  the  adjectives  communistic  and  socialistic,  are  also 
used  more  widely  to  describe  the  general  principle  of  any  modes 
of  governmental  interference  which  have  for  their  object  the 
attainment  of  the  same  result  in  a more  partial  way.  This 
practice  appears  to  me  convenient ; but  in  order  to  prevent 
vagueness  it  will  be  well  to  give  each  of  the  terms  as  precise 
a signification  as  possible,  without  deviating  materially,  from 
ordinary  usage. 

Of  the  two  terms,  “ socialism ” is  the  more  comprehensive; 
communism  being  generally  I'egarded  as  an  extreme  form  of 
socialism,  in  which  the  most  thorough-going  antagonism  to 
the  institution  of  private  property  is  manifested.  It  would, 
however,  be  hardly  convenient  to  restrict  the  term  communism 
to  systems  involving  the  complete  abolition  of  this  institution ; 
since  no  one,  I suppose,  has  ever  seriously  recommended  that 
(e.g.)  a man  should  not  have  private  property  in  his  clothes. 
I think,  therefore,  that  the  most  useful  way  in  which  we  can 
employ  the  terms  Communism  and  Communistic,  without  de- 
viating materially  from  ordinary  usage*,  is  to  restrict  them  to 
those  schemes  or  measures  of  governmental  interference  for 
equalising  distribution  which  discard  or  ovei'ride  the  principle 
that  a labourer’s  remuneration  should  be  proportioned  to  the 
value  of  his  labour. 

The  proposal  to  organise  society  on  a communistic  plan, 
so  as  to  distribute  the  annual  produce  of  the  labour  and  capital 
of  the  community  either  in  equal  shares,  or  in  shares  varying 
not  according  to  the  deserts  but  according  to  the  needs  of  the 
recipient,  is  one  of  which  the  serious  interest  has  now  passed 
away  ; though  a generation  ago  it  had  not  a few  adherents, 
and  was  supported  with  earnestness  and  ability  by  more  than 
one  competent  writer.  And,  notwithstanding  what  has  been 
urged  in  the  preceding  section,  the  proposition  that  a com- 
munistic distribution  would  produce  more  happiness  than  the 
present  system,  if  it  could  be  realised  without  materially  affecting 
production,  or  removing  needful  checks  to  population,  is  at  any 
rate  a very  plausible  one.  But  even  if  it  were  completely 

1 Cf.  Mill,  Book  II.  c.  i,  where  the  terms  are  used  with  a denotation  sub- 
stantially the  same  as  that  proposed  in  the  text. 


526 


POLITICAL  ECONOMY 


BOOK  III 


true,  I cannot  doubt  that  the  removal  of  the  normal  stimulus 
to  labour  (bodily  and  intellectual)  and  to  care,  which  the 
present  individualistic  system  supplies,  would  so  much  reduce 
the  whole  produce  to  be  divided,  that  any  advantage  derived 
from  greater  economy  of  distribution  would  be  decidedly  out- 
weighed— even  supposing  that  no  material  change  took  place  in 
population.  Probably  few  of  my  readers  will  dispute  this ; but 
I may  suggest  to  any  one  who  is  inclined  to  doubt  it,  to  compare 
the  average  energy  and  perseverance  in  labour  displayed  by 
even  respectable  and  conscientious  rich  persons,  even  when  they 
select  their  own  work,  with  the  avemge  energj'  and  persever- 
ance of  professional  men. 

If  this  objection  be  allowed  to  be  decisive,  there  will  be  no 
necessity  to  raise  the  very  uninviting  ethical  questions  which 
would  be  inevitably  presented  by  the  practical  problem  of 
preventing  too  great  an  increase  of  population  in  a communistic 
society.  1 do  not  indeed  regard  this  problem  as  insoluble ; but 
I do  not  see  how  the  difficulties  in  which  it  is  involved  are  to 
be  overcome  without  such  a revolution  in  the  traditional  habits 
and  sentiments  regulating  the  relations  of  the  sexes  as  no 
thoughtful  person  could  contemplate  without  alarm  and  dis- 
quiet. 

The  definition  of  Communism,  as  above  laid  down,  is  toler- 
ably distinct;  and  it  enables  us  to  give  a definite  significance 
to  the  adjective  “ communistic,”  in  its  wider  application  to 
denote  the  tendency  of  minor  governmental  interferences.  That 
is,  we  shall  classify  as  communistic  any  law  or  institution  by 
which  a portion  of  the  aggregate  produce  of  a community 
is,  by  the  agency  of  government,  distributed  to  indi\'iduals 
according  to  considerations  of  need,  without  regard  to  their 
deserts  or  previous  services.  For  instance,  according  to  this 
definition,  the  English  poor-law  is  communistic  in  its  effects — 
though  not,  perhaps,  in  its  principle*.  So  again,  public  roads, 
parks,  libraries,  churches,  &c.,  so  far  as  they  are  freely  used 
by  persons  who  are  not  taxed  for  their  maintenance,  must 
be  called  communistic ; though,  as  we  shall  hereafter  (§  6) 
notice,  the  bad  effects  of  communism  are  thought  to  be  avoided 
or  outweighed  in  these  cases. 


1 Cf.  ante,  c.  iii.  § 1,  and  also  § 5 of  this  chapter. 


CH-AP.  VII 


ECONOMIC  DISTRIBUTION 


527 


§ 4.  There  is  somewhat  more  difficulty  in  defining,  in  ac- 
cordance with  usage,  the  wider  terms  Socialism  and  Socialistic ; 
since  any  movement  for  substituting  governmental  for  private 
and  competitive  management  in  any  department  of  industry 
is  liable  to  be  called  socialistic : while,  at  the  same  time,  it 
would  seem  paradoxical  to  apply  the  term  to  such  established 
institutions  as  the  Post-Office,  or  the  Mint.  And  even  if 
we  agree  to  restrict  the  term  to  those  kinds  of  governmental 
intervention  which  not  merely  increase  production  but  also 
equalise  distribution,  we  still  do  not  obtain  any  broad  line 
of  demarcation.  For  any  considerable  extension  of  the  sphere 
of  government  that  is  really  successful  from  the  point  of  view 
of  production,  tends  pro  tanto  to  bring  about  the  results 
aimed  at  by  the  advocates  of  more  economic  distribution ; 
so  far  as  it  tends  to  increase  the  stock  of  capital  owned 
by  the  community,  and  to  reduce  the  field  of  employment 
for  private  capital. 

This  tendency  may  perhaps  be  most  easily  exhibited  by 
making  an  extreme  supposition.  Suppose  that,  in  civilised 
countries  generally,  governmental  administration  of  all  kinds 
of  business  were  shewn  to  be  economically  superior,  in  a 
marked  degree,  to  the  present  competitive  management : it 
is  obvious  that  the  State  might  gradually  buy  up  the  land  and 
fixed  capital  of  different  industries,  paying  for  them  out  of 
the  increased  proceeds  of  its  superior  management ; and  the 
process,  when  once  commenced,  would  go  forward  with  con- 
tinually increasing  rapidity.  The  field  of  investment  thus  be- 
coming gradually  more  and  more  limited,  the  return  to  private 
capital — supposing  saving  to  continue  as  at  present — would 
probably  begin  to  fall.  “ Spending”  would  then  increase  at  the 
expense  of  saving,  and  private  capital  would  gradually  diminish 
from  being  eaten  up.  It  would  be  important  that  the  State 
should  purchase  the  land  of  the  community,  and  other  perma- 
nent instruments  of  production  tending  to  rise  in  value — if 
there  be  any — at  an  early  stage  of  this  process : not  merely 
to  gain  the  unearned  increment,  but  because,  as  interest  sinks 
towards  zero,  the  selling  value  of  land  at  a given  rent  tends  to 
rise  proportionally.  The  process  might  conceivably  go  on  until 
the  payment  for  the  use  of  capital,  as  distinct  from  insurance 
against  risk,  became  nearly  evanescent;  so  that  only  such  an 


528 


POLITICAL  ECONOMY 


BOOK  III 


amount  of  private  capital  would  be  kept  up  as  men  would  be 
willing  to  keep  for  security  of  future  use  and  enjo}Tnent, 
without  any  view  to  profit.  And  finally  when  the  instru- 
ments and  materials  of  all  industries  had  become  the  property 
of  the  government,  the  aggregate  of  private  savings — lea^dng 
out  of  account  the  non-usurious  lending  and  borrowing  among 
private  persons  that  might  still  go  on — could  only  be  in  the  form 
of  “ consumers’  capital,”  i.e.,  houses,  gardens,  furniture,  jewels, 
pictures,  &c.  Suppose  further  that,  at  the  same  time,  by  a 
comprehensive  system  of  free  education,  elementary,  technical, 
and  professional,  the  present  scarcity  values  of  the  higher 
grades  of  labour  had  been  reduced,  so  that  all  such  skill  as 
average  persons  can  acquire  by  training  was  remunerated  by 
mei'ely  a fair  retum  for  the  additional  outlay  on  sustenance 
during  the  period  of  education.  We  should  thus  have  arrived 
at  something  very  like  the  ideal  of  economic  distribution  which 
German  socialists  have  jjut  forward,  without  any  sudden  shock 
to  the  expectations  formed  by  the  present  system  of  private 
property.  Society  would  voluntarily  have  converted  its  private 
capital  into  consumei-s’  wealth and,  through  the  agency  of 
its  government,  would  have  produced  for  itself  the  public  capital 
used  in  its  place.  The  income  of  all  individual  members  of 
the  community  would  be  entirely  derived  from  labour  of  some 
kind, — or,  in  the  current  phrase  of  the  socialists,  labour  would 
obtain  its  “ full  product  ” of  consumable  commodities  (subtract- 
ing only  whatever  additional  public  capital  had  to  be  pro^dded 
for  the  increase  of  its  future  produce). 

I need  hardly  say  that  any  such  increase  in  social  production 
through  governmental  administration  as  we  have  above  imagined 
IP  beyond  the  limits  of  any  rational  forecast  of  the  future 
development  of  society : it  is,  I suppose,  even  beyond  the 
dreams  of  the  most  sanguine  socialist.  My  aim  in  imagining  it 
has  chiefly  been  to  shew  how  any  effective  occupation  by  govern- 
ment of  a portion  of  the  present  field  of  employment  of  private 
capital  is  a step  toward  the  goal  at  which  socialists  aim ; i.e.,  it 
tends  to  bring  with  it  whatever  advantages  attach  to  the  reduc- 
tion of  existing  inequalities  of  distribution.  And  it  is  only  such 
mild  and  gentle  steps  towards  the  realisation  of  the  socialistic - 
ideal  that  I can  regard  as  at  all  acceptable,  in  the  present  con- 
dition of  our  knowledge  of  man  and  society.  I have  made 


CHAP.  VII 


ECONOMIC  DISTRIBUTION 


529 


clear  in  the  preceding  chapter  that  I do  not  hold  the  proposal, 
that  the  community  should  prohibit  interest  and  compulsorily 
purchase  with  terminable  annuities  the  land  and  instruments 
of  production  now  in  private  ownership,  to  be  beyond  the  pale 
of  theoretical  discussion  as  immoral ; but  I think  that,  con- 
sidering the  perils  of  so  vast  a revolution,  we  ought  to  have 
much  more  conclusive  evidence  than  has  yet  been  offered  of 
the  advantages  to  be  derived  from  it  after  the  struggle  is  over, 
before  it  can  be  even  worth  while  to  discuss  it  seriously  from  a 
practical  point  of  view.  At  the  same  time,  as  I have  i^lready 
explained,  I see  no  reason  to  regard  unqualified  laisset'  faire 
as  tending  to  realise  the  most  economical  production  any 
more  than  the  best  possible  distribution  of  wealth : and  it 
seems  to  me  quite  possible  that  a considerable  extension  of  the 
industrial  functions  of  government  might  be  on  the  whole 
advantageous,  without  any  Utopian  degree  of  moral  or  political 
improvement  in  human  society.  But  at  any  rate  to  be  success- 
ful such  extension  mu.st,  I think,  be  gradual ; and  the  first 
experiments  in  this  direction  ought  to  be  made  in  depart- 
ments in  which  the  defects  of  private  enterprise,  and  the 
advantages  of  unitary  administration,  have  been  she%vn  to  be 
greatest, — e.g.,  in  departments  where  there  is  a manifest  ten- 
dency to  the  establishment  of  monopolies  in  the  hands  either  of 
single  individuals  or  of  associations.  And,  moreover,  it  ought 
to  be  an  object  in  any  such  extension  to  maintain  as  far  as 
possible  in  the  governmental  organisation  of  industry  an  effective 
stimulus  to  individual  exertion,  and  to  allow  scope  for  invention 
and  improvement  of  methods. 

This  leads  me  to  a point  which  many  writers  have  regarded 
as  the  most  fundamental  objection  to  socialism ; the  difficulty, 
namely,  of  distributing  the  produce  of  joint  labour  so  as  to 
apportion  remuneration  to  desert.  In  the  preceding  chapter  I 
have  tried  to  shew  that  we  can  only  hope  to  realise  a remote 
approximation  to  this  ideal  of  distributive  justice,  by  getting 
rid  of  all  removable  differences  in  remuneration  that  are  due 
to  causes  other  than  the  voluntary  exertions  of  the  labourers. 
An  important  part  of  this  result  might,  I conceive,  be  brought 
about  through  the  assumption  by  government  of  the  main  in- 
dustrial functions  now  performed  by  private  capitalists,  without 
any  fundamental  change  in  the  principle  of  remuneration  now 

34 


S.  P.  E. 


530 


POLITICAL  ECONOMY 


1500K  III 


adopted  in  I’espect  of  governmental  officials,  if  at  the  same 
time  the  means  of  training  for  the  higher  kinds  of  work  were 
effectually  brought  within  the  reach  of  all  classes,  by  a well 
organised  system  of  free  education,  liberally  supjjorted  by  ex- 
hibitions for  the  children  of  the  poor.  For  as  the  instruments 
of  production  would  be  mainly  the  property  of  the  nation,  all 
the  inequalities  of  income  that  now  result  from  the  payment 
of  interest  to  private  capitalists  as  such,  or  of  profit  to  employ- 
ing capitalists,  would,  speaking  broadly,  have  ceased  to  exist ; 
and  though  it  would  be  impossible,  without  intolerable  con- 
straint on  the  freedom  of  action  of  individuals,  to  prevent  the 
children  of  persons  earning  larger  incomes  or  owning  accumu- 
lated wealth  from  having  a somewhat  better  start  in  life  than 
the  rest,  still  this  advantage  might  be  reduced  to  a minimum 
by  such  an  educational  system  as  I have  suggested.  But  it 
is  clear  that,  in  a conqiletely  socialistic  community,  the  re- 
muneration of  superior  qualities  of  labour  could  not  be  deter- 
mined by  reference  to  the  “ market  price  ” of  such  labour,  as 
there  would  be  no  market  outside  the  service  of  government, 
by  which  its  price  could  be  fixed:  the  “fair”  wages  of  such 
superior  labourers  would  have  to  dejiend  entirely^on  a govern- 
mental estimate  of  the  value  of  their  work.  I do  not,  however, 
see  that  the  influence  of  competition  need  be  excluded  alto- 
gether; there  might  be  competition  between  one  locality  and 
another  for  the  best  workers, — or  even,  to  some  extent,  between 
different  departments  of  a central  government : and  through 
such  competition  a tolerable  estimate  of  the  amount  necessjiry 
to  stimulate  adequately  to  the  acquisition  of  the  required 
•qualifications,  and  to  conqiensate  for  any  special  outlay  or 
sacrifices  involved  in  such  acquisition,  might  be  gradually  de- 
termined on  the  basis  of  experience.  And  for  remuneration 
of  special  services — e.g.,  useful  inventions — special  rewards, 
pecuniary  or  honorific,  might  be  added.  Still,  such  a system, 
at  its  best,  could  hardly  be  as  stimulating  as  the  present  open 
competition  to  pm’sons  with  great  gifts  for  business,  or 
mechanical  invention,  or  any  special  art  or  ju'ofession : our 
experience  of  governmental  work  affords  slender  ground  foi- 
the  belief  that  it  would  generally  either  give  due  play  to  the 
special  talents  of  such  persons,  or — even  if  it  did — would 
allot  to  the  giftetl  individuals  any  adequate  compensation  fi)r 


CHAP.  VIE 


ECONOMIC  DISTRIBUTION 


531 


the  additional  Eitility  which  they  would  produce  for  the  com- 
munity. 

The  question  i-emains,  whether  the  need  of  oi’ganising  new 
checks  to  population — which  we  have  seen  to  be  incident  to 
communism — would  also  ai-ise  under  such  a socialistic  system 
as. I have  just  sketched.  Thei-e  is  no  positive  necessity  that  any 
particular  department  of  a socialistic  government  should  be 
bound  to  find  Avork  for  any  applicant : individuals  might  be  left 
to  find  for  themselves  where  their  services  were  wanted,  relief 
being  provided  for  the  unemployed  under  some  such  deteri'ent 
conditions  as  those  of  our  existing  poor-law.  Still,  in  a commu- 
nitv  in  which  all,  or  the  tnost  important,  branches  of  pi-oduction 
wei'e  cairied  on  by  the  government,  the  unemployed  would 
naturally  throw  on  the  government  the  whole  responsibility 
foi-  their  situation ; and  if  their  number  became  at  any  time 
considerable,  a strong  demand  would  arise,  very  difficult  to 
resist,  that  the  State  should  provide  work  and  adequate  wages 
foE-  all  applicants.  It  does  not,  however,  appear  to  EEie  clear 
that  this  provision,  in  a coEEimEEnity  siECcessfully  organised  on  a 
socialistic  basis,  woeeW  lEecessarily  give  a dangeroEES  stimiElus  to 
j)0})iElation.  If  we  suppose  a coEiiEnunity  in  which  the  aggregate 
reEEiunei’ation  of  laboiEr  is  increased  by  most  of  the  share  that 
noAV  foE’EiEs  niterest  on  iEEclividiEals’  capital,  while  the  emoluments 
and  dignities  attached  to  the  higher  kinds  of  labour  are  brought 
within  the  hopes  of  all  classes  by  a vSystem  of  ediEcation  which 
at  the  same  time  Eiiakes  general  such  a degree  of  foresight  and 
iEEtelligence  as  is  now  possessed  by  the  higher  grade  of  artisans, 
— it  seeEiEs  quite  possible  that  in  such  a coEEiniEEnity  a EniniEniEm 
of  wages  EEiight  be  guaranteed  to  all  who  wcu-e  UEEable  to  find 
employiEient  for  theuEselves,  withoiEt  dE-awing  an  ever  increasing 
ci'uwd  of  applicants  to  claim  the  giEaranteed  miniEiEiEEu,  and 
without  a serioEES  deficit  arising  froEu  the  inefficient  wiEi-k  of 
sEEch  as  did  apply. 

§5.  The  qEEestion  of  the  “Right  to  LaboEEr”'  affoE'Els  a 
j)oint  on  which  we  Enay  conveniently  tuE’n  froiiE  iuEfigining  wluxt 
may  bo  in  the  distant  fiitEEre,  to  discuss  the  general  economic 
advuEEtages  and  drawRicks  of  SEEch  merESEEE'es  for  the  mitigation 

■ This  phrase  is  so  current  that  it  is  convenient  to  use  it  : but  it  must  be 
understood  in  the  light  of  Whately’s  remark  that  “ wlien  a man  says  he  wants 
“ work,  what  he  means  is  that  he  wants  wages.” 


:U— 2 


532 


POLITICAL  ECONOMY 


BOOK  III 


of  inequalities  of  distribution  as  can  be  considered  to  be  now 
within  the  pale  of  practical  consideration : for  the  “ right  to 
“ labour”  can  hardly  be  denied  a place  in  this  latter  class, 
since  Bismarck  declared*  it  to  be  one  of  the  objects  of  his 
government  to  secure  the  German  labourer  work  and  adequate 
wages.  I am  not,  however,  aware  that  Bismarck  or  any  in- 
fluential statesman  has  as  yet  proposed  any  scheme  for  attaining 
bis  end : and  I do  not  know  any  means  by  which  it  could  be 
./tained  in  a.  community  like  our  OAvn,  without  a grave  danger 
of  disastrous  consequences.  If  the  government  in  such  a 
country  as  England  guaranteed  even  a minimum  of  necessaries 
to  all  who  were  able  and  willing  to  give  a normal  day’s  work 
for  them — without  the  deterrent  conditions  under  which  such 
relief  is  actually  offered  to  able-bodied  paupers  in  an  English 
workhouse — we  can  hardly  doubt  that  the  labour  thus  purchased 
by  the  State  could  not,  even  by  good  organisation,  be  made  to 
pay  the  cost  of  its  support.  For  a labourer  employed  under 
such  a guarantee  could  not  be  dismissed  for  mere  inertness 
or  inefficiency,  but  only  for  such  wilful  and  obstinate  idleness 
as  would  justify  his  being  sent  to  prison : hence  he  would 
have  much  less  motive  than  at  present  either  for  working 
energetically  or  for  seeking  and  qualifying  himself  for  the 
employment  in  which  he  would  be  most  useful ; and  his  labour 
would  tend  to  be  proportionally  less  productive.  At  the  same 
time,  the  minimum  of  shelter  and  sustenance  that  humanity 
would  allow  to  be  given  him  would  cost  more  than  the  earnings 
of  the  worst-paid  labourers  at  the  present  time ; so  that,  on 
the  whole,  the  measure  would  both  materially  diminish  aggre- 
gate production  and  throw  a serious  burden  on  the  public 
purse— both  which  effects  would,  in  existing  circumstances, 
tend  continually  to  increase,  as  the  security  of  emplojunent 
would  give  an  important  stimulus  to  population. 

Nor  can  I agree  with  those  who  think  that — in  view  of  the 
distress  which  the  worst-paid  labourers  in  our  modem  com- 
munities endure — government  might  reasonably  prescribe  a 
minimum  of  wages  for  all  labourers  able  and  willing  to  give  a 
full  day’s  work,  without  incurring  the  dangers  connected  with  a 
goyernmental  provision  of  such  a minimum.  If,  indeed,  the 
commodities  produced  by  the  labourers  now  paid  less  than  the 
1 In  a speech  delivered  on  the  9th  of  May,  1884. 


CHAP.  VII 


ECONOMIC  DISTRIBUTION 


533 


proposed  minimum  were  of  such  a kind  that  if  the  price 
were  raised  the  demand  would  not  be  materially  diminished  nor 
a competing  supply  obtained  from  elsewhere,  the  desired  result 
might  be  attained ; as  the  lacking  quantum  of  wages  could  then 
be  obtained  by  employers  from  the  consumers.  But  I know  no 
ground  for  assuming  this  to  be  generally  the  case : and  so  far  as 
it  is  not  the  case,  the  legal  minimum  of  wages  would  tend  to 
throw  a number  of  the  worst-paid  labourers  out  of  work^:  hence 
to  prevent  widespread  distress  it  would  be  almost  necessary  to 
supplement  the  ‘prescription  of  a minimum  of  wages  by  the 
governmental  provision  of  employment  and  remuneration;  so 
that  this  method  of  raising  wages  could  hardly  fail  to  land  us 
in  all  the  difficulties  of  the  “ right  to  labour.” 

The  dangers  of  the  measures  just  mentioned  may  be  partly 
illustrated  by  the  actual  experience  that  has  been  gained  of  the 
dangers  incident  to  a kind  of  govermnental  interference  with 
distribution  which  all  modem  communities  have  thought  neces- 
sary, in  some  form  or  other,  for  the  protection  of  their  members 
from  absolute  want  of  the  necessaries  of  life.  I have  already 
pointed  out  that,  according  to  the  received  view  of  communism, 
which  I have  tried  to  express  in  a precise  definition,  the  English 
poor-law  must  be  allowed  to  be  communistic  in  its  effects — 
though  it  does  not  follow  that  its  adoption  is  in  any  way  due  to 
a communistic  design  or  principle.  In  fact  if  we  look  merely 
to  the  motive  which  prompts  the  community  to  grant  all  its 
members  legally  secured  relief,  we  should  rather  classify  this 
measure  with  the  interferences  to  protect  life  and  health,  which 
I noticed  in  a previous  chapter.  But  if  we  protect  the  health 
of  a starving  person  by  giving  him  necessaries  at  the  expense 
of  the  community,  our  action  inevitably  involves  to  some  extent 
the  evils  of  communism  whatever  its  intention  may  have  been  : 
that  is,  it  tends  to  decrease  the  inducements  to  labour,  fore- 
thought, and  thrift  in  two  ways,  (1)  by  distributing  to  paupers 
a certain  quantum  of  unearned  commodities,  and  (2)  by  taking 
from  non-paupers  a corresponding  portion  of  what  they  have 

^ Probably  an  increase  in  the  labourers’  efficiency  from  improved  physical 
conditions  would  in  some  cases  partly  compensate  for  the  increase  in  the  price 
of  their  services,  so  that  the  cost  of  these  to  the  employer  would  not  be  increased 
ill  proportion  to  the  rise  in  wages.  But  this  effect  could  not  be  relied  upon  to 
prevent  a reduction  in  the  demand  for  the  labour  raised  in  price. 


534 


POLITICAL  ECONOMY 


BOOK  III 


earned  or  saved.  The  former  of  these  bad  effects  may  be  in  the 
main  averted,  so  far  as  the  inducement  to  labour  for  present 
needs  is  concerned,  in  the  case  of  able-bodied  paupers,  by  ex- 
acting work  from  them  in  return  for  relief  under  somewhat 
disagreeable  conditions ; for  though  it  is  probably  impossible  to 
keep  this  compulsoiy  labour  up  to  an  average  degi’ee  of  energy, 
there  being  no  fear  of  dismissal  for  slackne.ss,  still  any  attrac- 
tiveness that  might  hence  attach  to  the  position  of  a jjauper 
may  be  more  than  counterbalanced  by  restrictions  on  freedom, 
and  by  the  prohibition  of  indulgences  not  necessary  to  health, 
but  yet  so  cheaj)  that  even  the  poorest  can  occasionally  enjoy 
them  : and,  in  fact,  English  experience  seems  to  shew  that  the 
provision  made  for  such  able-bodied  paupers  as  reside  in  a work- 
house  does  not  offer  any  serious  temptation  m en  to  the  woi-st- 
[»aid  labourers  to  relax  their  energies  in  si'eking  emplo3'ment 
elsewhere'.  On  the  other  hand,  it  seems  im])ossible  to  ])revent 
even  “ in-door  relief”  from  weakening  the  motives  that  ])rom])t 
the  poorest  class  of  labourers  to  earn  and  save  an  adeijuate  pro- 
vision against  sickness  and  old  age,  or  for  the  support  of  tlieii- 
families  in  case  of  premature  death  : and  this  is  still  more  mani- 
festly the  case  with  out-door  relief  And  it  is  the  expense  of 
supporting  those  who  are  wholl\^  unable,  or  but  veiu'  })artiall3' 
able,  to  work,  which  causes  ly  far  the  greater  part  of  the 
l)urden  of  taxation  entailed  by  jiauperism,  though,  foi-  the 
reas(»ns  already-  stated,  the  value  even  of  the  laboui-  of  the  able- 
bodied  falls  seriously  short  of  the  cost  of  their  shelter  and 
sustenance. 

The  bad  economic  effects  uf  this  taxation  on  the  persons 
taxed  de])eud  maiidv  on  its  com])ulsor\'  character:  since  a man 
does  not  feel  the  reward  of  his  labour  to  be  lessened  ly  the  fact 
that  he  voluntarily  bestows  a jxjrtion  of  it  in  alms.  It  would 
seem,  too,  that  if  the  destitute  ])ersons  could  be  adequateh' 
protected  from  starvation  b\'  any  measure  that  difi  not  give 
them  a definite  legal  security  of  obtaining  relief,  the  discourage- 
ment to  thrift  which  such  legally  secured  relief  entails  would  be 
partly  avoided.  Further,  if  the  legally  secured  relief  be  ke])t 

' The  vagrants,  on  the  other  hand,  who  spend  single  nights  in  the  ‘‘casual 
•‘wards”  of  different  workhouses,  have  a serious  temptation  to  idleness  in  the 
shelter  and  food  thus  provided  without  adequate  enforcement  of  labour  in 
return. 


CFAP.  VII 


ECONOMIC  DISTRIBUTION 


535 


inseparable  from  the  deterrent  conditions  necessary  to  prevent 
Its  worst  consequences,  it  cannot  be  regarded  as  a satisfactory 
jirovision  for  the  case  of  deserving  persons  who  have  fallen  into 
indigence  either  through  inevitable  and  irremediable  disaster,  or 
at  any  rate  from  causes  involving  no  serious  blame  to  them.  And 
in  fact  the  most  rigid  supporters  of  the  English  poor-law  have 
generally  recognised  the  moral  necessity  of  supplementing  it  by 
jirivate  almsgiving.  On  the  other  hand,  private  almsgiving,  being 
largely  impulsive,  unenlightened,  and  unorganised,  is  found  to 
give  serious  encouragement  to  unthrift,  and  even  to  imposture. 
These  considerations  suggest,  first,  that  government  might 
with  advantage  undertake  the  organisation  of  eleemosynary 
relief,  in  order  to  make  its  di.stribiition  as  economical,  effective, 
and  judicious  as  possible;  and,  secondly,  that  the  provision,  of 
funds  for  such  relief— so  far,  at  least,  as  they  are  used  for  the  ordi- 
nary sustenance  of  adults  in  distress’ — might  be  left  mainly 
to  voluntary  gifts  and  bequests,  with  a certain  amount  of  assist- 
ance from  government,  if  experience  shews  it  to  be  necessary, 
but  without  any  legal  right  to  relief  These  two  jirinciples  are 
maintained  in  the  treatment  of  pauperism  adopted  in  France ; 
and  the  experience  of  France  seems  to  shew  that  voluntary 
])rovision  if  carefully  organised  may  be  relied  on  as  nearly 
adequate  for  the  jiurpose  of  practically  secniring  the  poor  from 
.starvation ; and  also  that  relief  so  provided  may  be  distri- 
buted to  the  applicants  in  their  own  homes  without  the  bad 
consequences  that  out-door  relief  has  under  our  compulsory 
system : since  the  absence  of  legal  security  compensates  for 
the  absence  of  the  deterrent  conditions  of  the  workhouse'. 

But  again : assuming  that  government  ought  to  make  a 
legally  secured  provision  for  any  sick  or  infirm  member  of  the 
community  who  may  be  destitute  of  necessaries,  it  does  not 
therefore  follow  that  the  expense  of  this  pi-ovision  must  ordi- 
narily be  undertaken-  by  the  community,  so  far  as  adults  are 
concerned ; since  it  might  be  thrown,  wholly  or  in  part,  on  the 
individuals  themselves  by  laying  a special  tax  on  their  earnings 

I By  this  phrase  I mean  chiefly  to  exclude  the  sustenance  of  (1)  destitute 
children,  (2)  the  insane — whose  support  government  ought  to  undertake  as  a 
mere  measure  of  protection  to  other  members  of  the  community,  (3)  persons 
incapacitated  by  special  diseases.  I also  exclude  medical  aid  generally,  of  which 
I afterwards  speak. 

That  is,  in  default  of  near  relatives  on  whom  it  may  properly  be  thrown. 


536 


POLITICAL  ECONOMY 


BOOK  lit 


for  the  purpose  of  compulsory  insurance.  There  is  much  to  he 
said  for  this  method  * of  dealing  with  a part  at  least  of  the 
complex  problem  of  pauperism,  as  compared  with  the  method 
of  the  English  poor-law : and  though  the  political  interference 
with  natural  liberty  would  be  much  more  intense  in  the  former 
method,  the  economic  interference  would  be  much  less,  so 
far  as  the  measure  succeeded ; as  each  individual  would  be 
merely  coerced  into  providing  that  he  should  not  become  a 
burden  to  others.  I do  not,  however,  see  how  anything  like  the 
required  premiums  could  be  exacted  without  gi’eat  harshness 
from  labourers  who  have  now  scarcely  more  than  the  bare 
necessaries  of  life ; and  if  in  their  case  the  whole  or  the  greater 
part  of  the  funds  were  supplied  by  government,  the  danger  of 
weakening  the  normal  stimulus  to  exertion  and  thrift  on  the 
part  of  labourers  at  or  near  this  lowest  level  would,  I fear,  be 
decidedly  greater  than  that  which  attends  the  English  system  v 
The  case  of  labourers  thrown  temporarily  out  of  employment 
would  also  cause  considerable  difficulty^ 

1 This  method  has  been  partially  adopted  by  the  German  government  in 
two  important  measures  dealing  respectively  with  insurance  against  sickness 
(1883)  and  insurance  against  accidents  (1884). 

- Mr  W.  L.  Blackley  has  argued,  in  a series  of  pamphlets,  that  the  required 
payments  might  be  made  by  young  labourers  between  the  time  that  they  become 
able  to  earn  the  wages  of  adults  and  the  age  of  21.  I think  he  has  shewn  that 
the  majority  of  male  labourers  might  in  this  way  be  made  to  supply,  without 
painful  sacrifices,  at  any  rate  a large  part  of  the  funds  required  to  secure  them 
against  destitution  in  sickness  and  old  age ; nor  can  I see  that  there  are 
serious  difficulties  in  the  way  of  making  such  saving  compulsory  on  all  persons 
in  regular  employment  by  laying  on  employers  the  obligation  to  in.sure  their 
labourers.  But  it  would  be  hardly  po.ssible  to  collect  the  required  payments 
from  the  class  of  persons  who  pick  up  their  livelihood  by  various  irregular 
kinds  of  work ; while  if  such  irregulars  were  exempted  from  compulsion  the 
increase  in  their  number  that  must  be  expected  to  result  from  the  proposed 
measure  would  be  a serious  economic  drawback.  And  further  it  does  not  seem 
that  the  measure  could  be  applied  to  the  worst-paid  class  of  labourers — chiefly 
women — without  reducing  their  wages  below  the  amount  required  to  keep  them 
in  health.  Even  in  classes  above  the  lowest  in  the  scale  of  wages  there 
would  be  many  exceptional  cases  in  which  such  a measure  as  Mr  Blackley 
proposes  would  cause  great  hardship:  as  (e.g.)  the  case  of  young  persons 
supporting  widowed  mothers,  infant  brothers  and  sisters,  &e. 

^ As  Brentano  has  pointed  out,  the  case  of  insurance  against  accidents  in 
dangerous  industries  is  specially  favourable  for  compulsion;  because  the  work- 
man out  of  employment  is  also  out  of  danger.  Here  too  the  employers  would 
properly  bear  a share  of  the  cost,  namely,  what  would  be  equivalent  to  their 
liability  to  compensate  the  uninsured  labourer  for  certain  kinds  of  accidents. 


CHAP.  VII 


ECONOMIC  DISTRIBUTION 


537 


§ 6.  Besides  providing  the  necessaries  of  life  to  persons 
completely  destitute,  modern  governments  have  intervened  in 
various  other  ways,  with  the  view  of  ameliorating  the  economic 
condition  of  the  poorer  classes  at  the  expense,  more  or  less,  of 
the  rest  of  the  community.  But  such  intervention  has  usually 
— and  in  my  opinion  rightly — aimed  at  improving  production 
as  well  as  distribution,  or  otherwise  benefiting  the  community 
as  a whole,  and  not  one  part  only  at  the  expense  of  the  rest. 
Accordingly  the  chief  examples  of  this  kind  of  intervention 
have  already  called  for  our  notice  in  a previous  chapter  (ch.  iv.). 
Thus  in  some  cases  its  object  has  been  to  provide  commodities 
specially  conducive  to  the  moral  or  intellectual  improvement 
of  the  classes  benefited,  and  which  at  the  same  time  hardly 
form  an  element  of  that  “ standard  of  comfort  ” which  supplies 
the  chief  ordinary  motive  to  labour  and  thrift ; in  other  cases 
it  has  aimed  at  making  such  a change  in  the  circumstances  of 
the  persons  assisted  as  would  tend  to  strengthen  on  the  whole, 
rather  than  weaken,  habits  of  energetic  industry,  thrift,  and 
self-help  in  the  individuals  assisted.  Under  the  first  head 
would  come,  for  instance,  the  pecuniary  aid,  before  discussed, 
which  modern  states  have  largely  given  to  education — in- 
cluding the  diffusion  of  culture  by  means  of  libraries,  museums, 
&c. : under  the  second  head  I should  place  assistance  to  emi- 
gration, and  also  most  interferences  with  the  tenure  of  land, 
especially  those  of  which  the  object  has  been  to  place  the 
actual  cultivators  of  the  soil  in  a position  more  favourable  to 
effective  industry.  As  an  example  of  this  latter  class  we  may 
notice  the  important  assistance  given  in  recent  times  by  the 
governments  of  Prussia  and  Hesse  Darmstadt  to  facilitate 
the  transition  of  their  peasantry  from  feudal  semi-servitude  to 
the  condition  of  independent  proprietors.  This  assistance  did 
not  involve  any  direct  pecuniary  sacrifice  on  the  part  of  the 
community;  but  it  was  nevertheless  a distinctly  distributional 
interference,  since  it  gave  the  peasants  the  advantage  of  the 
superior  credit  enjoyed  by  the  community — and  also  of  the 
advantage  in  efficiency  and  cheapness  which  the  governmental 
collection  of  rents  was  found  to  possess,  compared  with  the  col- 
lection by  private  individuals.  From  these  two  sources  a margin 
was  obtained  enabling  the  cultivator  to  refund  to  the  State, 
within  a not  very  long  period,  the  capital  with  which  his  land- 


538 


POLITICAL  ECONOMY 


BOOK  III 


lord’s  rent-charge  had  been  bought  up,  without  any  increase  of 
his  rent. 

The  intervention  just  described  was  for  a sjiecial  and  tempo- 
rary object.  But  experience  has  shewn  that  peasant  cultivators 
are  liable  to  become  loaded  with  debt  to  money-lenders  who, 
either  through  the  absence  of  effective  competition — partly  in 
conseipience  of  a certain  discredit  that  often  attaches  to  their 
business — or  perhaps  sometimes  through  unavowed  combina- 
tion, are  enabled  to  exact  very  onerous  interest.  This  condition 
of  debt  tends  to  jiaralyse  the  jiroductive  energies  as  well  as  to 
cause  distress : accordingly,  in  these  circumstances  governments 
may  operate  foi'  the  benefit  of  production  no  less  than  of 
distribution,  by  encouraging  with  special  privileges  the  forma- 
tion of  commercial  companies  for  the  purpose  of  lending  money 
on  easier  terms.  Indeed,  as  was  before  said,  the  business  of 
lending  on  the  security  of  land  seems  to  be  of  a kind  that 
might  even  be  undertaken  by  government  itself  unrler  certain 
conditions,  without  the  kind  of  ri.sk  that  is  involved  in  ordinary 
banking  luisiness.  So  too,  where  the  ])awnbroker  is  the  normal 
resort  in  an  emergency  of  poor  labourers  who  have  not  saved  or 
have  exhausted  their  savings,  governments,  by  undertaking  the 
business  of  lending  money  at  a moderate  interest,  may  give 
sensible  relief  without  offering  an}’  material  encouragement  to 
unthrift. 

Another  inqiortant  case  of  interference  primarily  distribu- 
tional, but  which  also  admits  of  being  defended  as  beneffcial  to 
the  community,  is  that  of  measures  for  protecting  the  health  of 
the  poor,  so  far  as  the  cost  of  these  is  defi’ayed  by  taxation  falling 
on  the  rich.  Thus  the  ]irovi.sion  in  certain  cases  of  wholly  or 
pai'tially  gratuitous  medical  advice  and  attendance  both  tends 
to  benefit  production  b}’  increasing  the  average  ])hysical  vigour 
of  the  labourers,  and  also  affords  those  who  are  taxed  to 
])av  for  it  a certain  jirotection  against  infectious  or  epidemic 
diseases:  and  the  same  may  be  said  of  other  sanitary  measures 
primarily  affecting  the  pooiau’  classes,  of  which  the  cost  has 
been,  wholly  or  ])artly,  borne  by  the  community’  on  economic 
grounds. 

> An  important  example  of  such  measures  may  be  observed  in  the  English 
Act  of  1875  for  destroying  and  replacing  unhealthj-  blocks  of  houses  in  t ovns; 
since  the  total  cost  of  this  operation  is  necessarily  much  beyond  what  can  be 


CHAP.  VII 


economic;  distribution 


539 


How  far  the  State  ought,  on  economic  gi'ounds,  to  inter- 
vene in  the  matters  above-mentioned,  and  others  to  which 
similar  principles  may  be  applied,  is  a cpiestion  which  in- 
volves a very  difficult  and  complex  comparison  of  various 
kinds  of  social  utility.  And  I do  not  think  that  it  admits 
of  a precise  general  answer;  as  the  balance  of  advantage 
in  any  case  must  depend  very  largely  on  jiarticulai'  circum- 
stances and  varying  social  conditions.  One  important  con- 
sideration by  which  the  answer  must  jiartly  be  determined 
is  the  extent  to  which  provision  has  lieeii  made,  or  may  be 
expected  to  bc‘  made,  for  the  ends  in  view,  either  through  the 
spontaneous  association  of  the  jiersons  jirimarily  concerned,  or 
the  philanthropic  efforts  of  other  individuals,  or  both  combined. 
Thus  exjierience  has  shewn  that  in  im]iortant  cases  where  mere 
competition  among  producers  fails  to  lower  sufficiently  the 
}»rice  of  certain  commodities  to  the  poorer  consumers,  the  latter 
may  successfully  relieve  themselves  of  the  resulting  disadvan- 
tages by  spontaneous  association — as  in  the  case  of  the  (artisans’) 
“co-opcrati\('  stores”  of  England,  and  the  “co-operative  b;inks”  of 
Germany;  and  wliere  this  remedy  can  be  successfully  applied 
it  is  douVitless  preferable,  botli  hir  its  direct  and  its  indirect 
effects,  to  goverimu'iital  intervention.  Again,  the  jiromotion  of 
e.diication  and  culture,  and  the  cure  of  diseases,  have  been 
largely  ])rovided  for  in  imxlern  civilised  communities  by  the 
voluntary  contributions  of  individuals;  partly  by  the  donations 
of  the  lii’ing,  partly  by  beipiests.  (.)ver  the  gifts  (or  loans)  of 
the  living,  the  State  can  exercise  but  very  slight  control — except 
by  offering  to  I'eceive  and  administer  them — without  vexatious 
and  dangerous  interference  with  liberty;  but  the  same  danger 
does  not  attend  interferenci;  with  funds  bequeathed  for  ]iublic 
objects:  governments  have  always  claimed  the  right  of  invali- 
dating testanientary  disjiositions  that  are  held  to  be  contrary 
to  }mblic  iHilicy,  and  this  ])rinci])le  might  reasonably  be  aj)- 
plicd  to  prevent  Inxpiests  of  which  the  economic  consequences 
are  clearly  seen  to  be  disad\antageous.  Further,  as  the  ad- 
ministration of  such  funds  is  generally  removed  from  the 
influence  of  the  ordinary  economic  motives  jtrompting  to  the 

met  by  the  rents  of  the  new  lionses — due  compensation  bein}»  allowed  to  the 
owners  of  such  houses  as  are  not  judsed  to  deserve  penal  destruction,  and  to 
traders  whose  business  connexion  is  impaired  by  dislodgement. 


540 


POLITICAL  ECONOMY 


BOOK  III 


most  useful  employment  of  wealth,  it  is  important  that  it 
should  be  carefully  supervised  by  the  State,  in  order  to  carry 
out  the  real  wishes  of  the  testators ; and  also  that  the  schemes 
of  the  latter  should  be  subject  to  thorough  revision  when  a 
certain  period  has  elapsed ; since  human  foresight  is  very 
limited,  and  the  fitness  of  any  detailed  regulations — even  if 
originally  well  contrived — for  effecting  any  purpose  of  social 
utility,  is  pretty  sure  to  decrease  as  time  goes  on.  Interference 
of  this  latter  kind,  however,  should  be  controlled  by  a careful 
regard  for  the  testators’  main  aims  and  wishes,  for  fear  of  se- 
riously checking  the  disposition  to  make  such  bequests:  since 
it  is  an  important  gain  to  society  that  such  expenditure  as  is 
desirable  for  the  purpose  of  ameliorating  the  condition  of  the 
poor  should  be  defrayed  by  this  means  of  supply  so  far  as 
possible,  rather  than  by  taxation. 

§ 7.  If,  however,  the  expediency  of  governmental  inter- 
ference, having  a markedly  distributional  character,  depends 
greatly  on  the  extent  to  which  provision  is  voluntarily  made 
for  certain  social  needs,  we  are  naturally  led  to  ask  on  what 
principles  such  action  on  the  part  of  private  persons  should  be 
determined.  I shall  consider  this  question — so  far  as  seems 
suitable  in  such  a treatise  as  the  present — in  the  concluding 
chapter:  but  I may  here  point  out  that  it  is  important  to 
distinguish  clearly  between  what  should  be  morally  imposed  in 
the  name  of  strict  justice  and  what  should  be  morally  encouraged 
as  wise  beneficence.  Any  rich  individual  who  restricts  his 
consumption  of  luxuries,  in  order  to  distribute  his  superfluous 
wealth  among  poorer  members  of  the  community,  tends  pro 
tanto  to  bring  about  what  I have  called  a more  “ economic  ” 
application  of  the  material  means  of  happiness,  if  only  he 
manages  his  distribution  so  as  to  avoid  impairing  the  normal 
motives  to  energy  and  thrift  in  the  recipients  of  his  beneficence. 
But  it  is  much  more  doubtful  whether  “ distributive  justice  ” — 
so  far  as  this  diverges  from  the  result  brought  about  by  open 
competition — can  be  effectively  promoted  by  the  voluntaiy 
action  of  private  pemons.  For  any  such  action  would,  fi'om  its 
inevitably  partial  and  sporadic  character, — since  only  a few 
jjersons  could  be  braced  up  to  the  requisite  sacrifices, — tend 
to  introduce  a new  kind  of  inequality. 

There  is,  however,  one  case — of  growing  importance  in  the 


CHAP.  VII 


ECONOMIC  DISTRIBUTION 


541 


present  organisation  of  industry — in  which  there  is  primd  facie 
more  opportunity  for  a private  application  of  distributive  justice. 
I refer  to  the  problem  of  dividing  the  produce  of  industry 
between  opposing  combinations  of  labourers  and  employers. 
Here,  as  was  before  explained*,  economic  science  cannot  deter- 
mine a normal  division,  on  the  basis  of  its  ordinary  assumption 
of  self-interest  as  the  governing  motive  in  the  exchange : it  can 
only  determine  roughly  the  limits  within  which  it  is  the  interest 
of  both  sides  to  accept  any  terms  rather  than  finally  break  off 
negotiations.  But  if  any  principle  of  fair  division  could  be  laid 
down,  then — provided  that  the  division  determined  by  it  fell 
anywhere  between  these  limits — the  ordinary  economic  motive 
would  tend  powerfully  to  maintain  it  in  general  application, 
owing  to  the  strong  interest  that  both  the  opposing  combina- 
tions have  in  avoiding  strife. 

At  the  same  time,  I do  not  think  that  this  conflict  of 
opposing  combinations  can  be  decided  by  any  general  principle 
of  social  justice,  determining  how  much  either  party  ought  to 
receive  of  the  value  of  their  common  product.  No  voluntary 
combination  of  labourers  could  be  expected  to  undertake  the 
task  of  securing  for  every  labourer  who  wants  it  a “ fair  day’s 
“ wages  for  a fair  day’s  work  ” : practically  actual  struggles  have 
always  related  to  the  wages  of  labourers  in  some  special  branch 
of  production : there  is  no  means  of  ascertaining  what  wages 
such  a group  of  labourers  would  obtain  if  all  removable  in- 
equality of  opportunities  were  absent : and  we  are  not  even 
warranted  in  assuming  that  they  would  now  be  content  with 
this,  if  it  could  be  ascertained, — still  less  that  it  would  be  the 
interest  of  the  employers  to  give  this  amount  of  wages  rather 
than  withdraw  from  the  business.  Hence  in  any  rational 
process  for  determining  the  “ fair”  wages  of  a group  of  combined 
labourers  there  must  be  an  arbitrary  point  of  departure : some 
particular  ratio  between  their  wages  and  the  value  of  the  net 
produce  of  thei^  industry,  under  certain  actual  conditions,  must 
be  assuhied  to  be  “ fair,”  and  the  definite  question  must  be  how 
to  maintain  “ fairness,”  so  understood,  under  changing  conditions. 
This,  I conceive,  is  the  principal  theoi'etical  problem  presented  to 
Boards  of  Arbitration  between  labourers  and  employers : and  an 
approximate — though  necessarily  rough  and  imperfect — solution 

* See  pp.  354,  5. 


542 


POLITIC  !AL  ECOKOMV 


BOOK  in 


of  this  problem  would  seem  to  be  aimed  at  in  the  automatic 
sliding  scales  by  which  conflict  has  been  ])artially  jirevented  in 
certain  ind\istries  in  recent  ylears. 

.So  long  as  no  material  chartge  takes  j)lace  in  the  processes 
of  the  industry,  or  in  the  quality  o'f  dhe  labour  erajiloyed  in  it — 
including  the  emjiloyei's’  own  labohr— the  problem  offers  little 
theoretical  difficulty:  net  produce  can  be  estimated  with 
sufficient  accuracy  by  subtracting  from  the  ])rice  of  the  com- 
modities ])i'oduced  the  cost  of  the  I'aw  material  and  other 
capital  consumed  in  producing  them,  ami  wages  can  be  made 
to  vary  so  as  to  maintain  the  same  proportion  to  net  ])roduce. 
If,  howevei',  the  processes  of  the  industry  change  so  as  to  alter 
materially  the  ])roportion  of  laboui'  to  ca])ital,  or  of  one  kind  of 
labour  to  another  kind,  a somewhat  different  com])arison  will 
be  required.  It  will  then  be  needful  to  ascertain  the  propor- 
tion borne  bv  wages,  in  the  division  assumed  to  be  fair,  to 
average  employt'i’s’  earnings  per  cent.'  of  capital — i.e.,  to  net 
profit  with  interest  and  allowance  for  risk  subtracted — in  order 
to  keej)  the  proportion  ajijiro.ximately  stable  in  any  I’evision  of 
wages.  Theoretically  an\'  asceitainable  change  in  the  average 
quality  of  business  management  ought  to  affect  the  proportion: 
luit  in  jiractice  this  point  could  hardly  be  satisfactorily  in- 
vestigated. On  the  other  hand,  a change  in  the  efficiency  of 
manual  labour  is  more  easily  taken  into  account,  and  ought  to 
be  so  taken  : the  stable  proportion  ought  to  be  between  em- 
jiloyers’  earnings  and  the  remuneration  of  labour  of  a given 
efficiency.  But  variations  in  the  demand  for  labour  ought  not, 
I conceive,  to  be  admitti'd  as  grounds  for  varying  the  pro- 
portional division  agreed  iqion,  though  they  must  affect  the 
limits  within  which  this  division  will  be  sustained  by  ordinary 
economic  motives:  since  the  fundamental  assunqitioh  in  the 
discussion  between  the  opposing  combinations  is  not  that  the 
effects  of  free  conqietition  are  to  be  imitated  as  f;ir  as  possible  in 
the  settlement  arrived  at,  but  rather  that  thev  are  to  be  resisted 
and  modifii'd.  Again,  it  is  obvious  that  changes  in  the  imrchasing 
jiower  of  money  are  not  to  be  taken  into  account,  unless — as 

' There  are  objiTfions,  as  I have  before  pointed  out  (Book  II.  c.  ix.  § 3), 
to  the  general  as^unl[)llou  that  a uniform  rate  of  emplo3er.s’ earnings  per  cent, 
of  capital  is  normal  : but  1 do  not  think  that  any  other  assumption  would  be 
practicable  in  the  present  case. 


CHAP.  VII 


ECONOMIC  DISTRIBUTION 


543 


may  happen — they  atfect  the  prices  of  commodities  consumed 
by  labourers  and  employers  respectively  in  appreciably  different 
degrees. 

It  is  probably  desirable  that  the  variations  in  wages,  from 
the  amount  originally  fixed,  should  be  reduced  by  throwing 
on  employers  the  larger  share  of  lo.ss  through  any  fall  in  the 
price  of  the  net  produce  of  the  industry.  But  if  this  is  done  it 
should  be  as  a matter  of  express  agreement,  with  a view  to 
the  distinct  end  of  avoiding  fluctuations  in  wages : and  the 
employers  should  of  course  be  compensated  by  a corre.spondingly 
lai'ger  share  of  gain  from  a rise  in  price. 


CHAPTER  VIII. 


PUBLIC  FINANCE. 

§ 1.  I HAVE  deferred  to  this  chapter  the  discussion  of 
the  subject  which,  in  the  view  of  Adam  Smith  and  many  of  his 
successors,  is  the  main  and  almost  the  sole  concern  of  the  Art 
of  Political  Economy  ; namely,  the  “ provision  for  the  expenses  of 
“ the  Sovereign  or  the  Commonwealth  ” • or,  as  it  seems  con- 
venient to  call  it.  Public  Finance.  I have  adopted  this  course, 
because  it  seemed  clear  that  the  general  discussion  of  the  prin- 
ciples of  governmental  interference,  for  the  improvement  either 
of  pnjduction  or  of  distribution,  ought,  if  introduced  at  all,  to 
precede  the  discussion  of  the  principles  of  finance : since  most 
known  methods  of  providing  for  the  expenses  of  the  common- 
wealth involve  important  effects  both  on  production  and  on 
distribution,  and  our  judgment  as  to  the  expediency  or  legiti- 
macy of  these  effects  cannot  fiiil  to  be  influenced  by  the  con- 
clusions adojjted  on  the  questions  discussed  in  the  preceding 
chapters  of  this  Book.  It  is  true  that  considerations  of  this 
kind  cannot  always  be  decisive ; the  hard  necessity  of  obtaining 
supplies  for  the  exigencies  of  government  may  compel  a financier 
to  adopt  measures  whose  detrimental  effects  on  industry'  are 
generally  recognised  ; but  none  the  less  it  is  desirable  that  he 
should  take  account  of  these  effects,  in  order  that,  if  he  is 
unable  to  avoid  them  altogether,  he  may  mitigate  or  compen- 
sate them  as  far  as  possible. 

Some  writers,  again,  have  taken  a somewhat  narrower  view 
of  the  subject  of  the  jiresent  chapter : confining  their  attention 
to  what  they  have  designated  the  “ theory  of  taxation.”  And 
no  doubt,  in  any  modern  civilised  community,  taxation  is  the 


CHAP.  VIII 


PUBLIC  FINANCE 


545 


chief  mode  by  which  the  ordinary  pecuniary  wants  of  govern- 
ment are  supplied.  But  in  no  community  is  it  the  sole  mode ; 
and  it  appears  to  me  that  we  are  likely  to  get  a clearer  view  of 
the  principles  on  which  a system  of  taxation  ought  to  be  con- 
structed, if  we  begin  by  considering  other  methods  of  attain- 
ing the  financier’s  end.  Indeed  my  doubt  is  rather  whether 
the  scope  of  this  part  of  our  discussion  should  not  be  enlarged 
still  further,  so  as  to  include  the  economic  principles  of  govern- 
mental expenditure  as  well  as  the  provision  for  defi’aying  such 
expenditure.  It  is,  however,  difficult,  in  treating  of  the  art  of 
economically  organising  governmental  administration,  to  get 
beyond  the  general  principle  that  we  ought  to  aim  at  pro- 
ducing the  greatest  possible  result  with  the  least  possible  cost, 
without  entering  into  the  details  of  governmental  business 
to  an  extent  which  seems  unsuitable  to  the  character  of  this 
treatise.  I do  not,  therefore,  propose  to  treat  of  the  art  of  public 
expenditure,  except  so  far  as  it  is  specially  connected  with  the 
art  of  providing  for  such  expenditure. 

There  are  two  ways  in  which  this  connexion  becomes  im- 
portant. In  the  first  place,  we  have  to  make  the  general  obser- 
vation that  we  cannot  properly  take  governmental  expenditure 
as  something  of  which  the  amount  is  fixed  prior  to  the  con- 
sideration of  the  methods  of  supplying  it  and  their  effects. 
Practically,  no  doubt,  the  problem  of  finance  is  often  presented 
to  a statesman  in  this  simplified  form ; but  theoretically  we 
must  regard  both  expenditure  and  supply  as  having  at  least  a 
margin  within  which  the  restriction  or  enlargement  of  either 
must  partly  depend  on  the  effects  of  the  corresponding  re- 
striction or  enlargement  of  the  other ; within  which,  therefore, 
the  gain  secured  to  the  public  by  an  additional  increment  of 
expenditure  has  to  be  carefully  weighed  against  the  sacrifices 
inevitably  entailed  by  the  exaction  of  an  additional  increment 
of  supply.  This  remains  true  even  if  the  sphere  of  government 
be  restricted  to  the  “ individualistic  minimum  ” given  at  the 
outset  of  chapter  ill.  No  doubt  it  is  the  worst  possible  economy 
not  to  make  adequate  provision  for  the  necessary  and  acknow- 
ledged functions  of  government;  but  adequacy  in  such  cases 
cannot  be  defined  by  a sharp  line.  Most  Englishmen  are  per- 
suaded that  they  at  present  enjoy  very  tolerable  protection  of 
person  and  property  against  enemies  within  and  without  the 

35 


S.  P.  E. 


546 


POLITICAL  ECONOMY 


BOOK  III 


country ; but  it  would  be  difficult  to  argue  that  our,  security 
would  not  be  enhanced  by  more  and  better-paid  judges  and 
policemen,  or  more  and  better-equipped  soldiers  and  sailors. 
Proposals,  in  fact,  are  continually  made  for  increased  expendi- 
ture in  one  or  other  of  these  directions : and  it  is  obvious  that 
in  judging  of  such  proposals  a statesman  must  balance — roughly 
no  doubt,  but  as  well  as  he  can — the  advantages  of  increased 
governmental  efficiency  against  the  difficulties  and  drawbacks 
of  obtaining  increased  supply.  And  it  is  still  more  evident 
that  any  question  as  to  the  extension  of  what  Mill  distinguishes 
as  the  “ optional  ” functions  of  government  must  be  decided  bv 
a similar  balance  of  considerations. 

But  again,  the  theory  of  expenditure  has  another  special 
connexion  with  the  theory  of  supply,  so  far  as  particular  sources 
of  supply  are  specially  adapted  to  particular  kinds  of  ex- 
penditure. 

§ 2.  In  order  to  shew  the  importance  of  this  latter  connexion 
let  us  consider  separately  each  of  the  chief  modes  by  which 
government  obtains  the  commodities  it  requires.  These  com- 
modities may  be  divided  into  (1)  ser\dces,  (2)  material  products 
requiring  to  be  continually  supplied,  and  (3)  land,  buildings, 
and  other  comparatively  permanent  investments  of  capital ; and 
both  services  and  .matei'ial  products  may  be  obtained  either 
(a)  without  purchase,  or  (6)  by  purchase  with  money  previously 
provided  in  some  way.  In  many  civilised  countries  an  im- 
portant part  of  the  services  required  by  government  is  obtained 
otherwise  than  by  free  exchange.  In  England,  for  instance,  the 
work  of  legislation  is  unpaid ; and  so  is  a considerable  share  of 
the  judicial  work,  whether  performed  voluntarilyj  as  in  the  case 
of  magistrates,  or  compulsorily,  as  it  is  by  jurymen.  We  are  not, 
how'ever,  concerned  to  do  more  than  notice  these  facts : since  the 
desirability  of  imposing  or  accepting  these  unremunerated  ser- 
vices is,  I conceive,  a political  question  in  the  decision  of  which 
economic  considerations  have  but  a subordinate  place.  This 
cannot  be  so  decidedly  said  in  the  case,  economically  far  more 
important,  of  labour  obtained  compulsorily  for  the  puiTioses  of 
military  (including  naval)  service.  The  defenders  of  the  com- 
pulsory system  have  no  doubt  urged  other  than  economic  reasons 
in  its  favour : it  has  been  said,  for  instance,  that  the  defence  of 
one’s  country  is  a function  which  ought  to  be  undertaken  from 


CHAP.  VIII  , 


PUBLIC  FINANCE 


547 


patriotism  or  a sense  of  duty,  rather  than  from  mercenary 
motives  and  a taste  for  the  incidents  of  the  painful  business  of 
mutual  slaughter ; and  that  it  ought,  therefore,  not  to  be  made 
the  work  of  a special  profession  recruited  in  the  ordinary  way  by 
free  contract,  but  rather  imposed  upon  all  citizens,  whom  there 
is  not  some  special  reason  for  exempting.  It  has  been  urged 
further  that  this  system  diminishes  the  constitutional  dangers 
inseparable  from  the  existence  of  a large  standing  army;  since 
conscripts  are  less  likely  than  professional  soldiers  to  be  se- 
duced into  fighting  unjustifiably  against  the  established  political 
order. 

But,  whatever  weight  may  be  attached  to  these  or  other 
non-economic  arguments,  it  seems  undeniable,  at  any  rate, 
that  in  certain  circumstances  there  may  be  overwhelming 
economic  considerations  in  favour  of  compulsory  service.  Where, 
indeed,  the  number  of  soldiers  and  sailors  required  for  warlike 
purposes  is  not  large  in  proportion  to  the  population,  and  their 
services  can  be  obtained  at  about  the  rate  at  which  labour  of 
similar  quality  would  be  hired  for  peaceful  industry,  voluntary 
enlistment  seems  clearly  the  most  economical  system;  since 
it  tends  to  select  the  pei-sons  most  likely  to  be  efficient  soldiers 
and  those  to  whom  military  functions  are  least  distasteful ; both 
which  advantages  are  lost  by  the  adoption  of  the  compulsory 
system.  But  a nation  may  unfortunately  require  an  army  so 
large  that  its  ranks  could  not  be  kept  full  by  voluntary  enlist- 
ment, except  at  a rate  of  remuneration  much  above  that  which 
would  be  paid  in  other  industries  for  labour  that  requires  no  more 
outlay  in  training  and  no  scarcer  qualifications : and  in  this  case 
the  burden  of  the  taxation  requisite  to  provide  for  such  an  army 
may  easily  be  less  endurable  than  the  burden  of  compulsory 
service. 

However,  to  present  even  the  economical  argument  on  this 
question  completely  we  should  have  to  consider  the  respective 
advantages  of  short  and  long  service,  the  proper  relation  between 
the  regular  army  and  the  reserve,  and  other  details  of  military 
(and  naval)  organisation  into  which  my  limits  do  not  allow  me 
to  enters 

1 It  should  be  observed  that  even  where  the  services  of  soldiers  and  sailors 
are  obtained  by  a compulsory  system,  their  pay  and  equipment  are — wholly  or 
mainly — provided  at  the  expense  of  the  nation. 


35—2 


648 


POLITICAL  ECONOMY 


BOOK  iir 


The  material  products  required  by  the  State  it  is  ordinarily 
expedient  to  obtain  by  purchase,  leaving  the  production  of  them 
to  private  industry ; for  the  reasons  that  lead  us  to  regard  the 
present  individualistic  organisation  of  industry  as  in  general 
economically  superior  to  a socialistic  organisation.  But  in  cer- 
tain cases  these  arguments  either  do  not  apply  or  are  balanced 
by  special  reasons  in  favour  of  State  manufacture : either  where 
the  articles  required  by  government  are  of  a quite  peculiar  kind 
(such  as  the  instruments  of  warfare,  cannons,  ironclads,  &c.)  so 
that  the  manufacture  is  in  any  case  likely  to  be  concentrated  in 
a very  few  hands ; or  where  the  quality  of  the  article  is  very 
important  and  at  the  same  time  difficult  to  test  if  obtained  by 
purchase ; or  where  systematic  and  costly  experiments  in  pro- 
duction are  required.  And,  moreover,  where  government  is 
supplying  its  own  needs,  some  part  of  the  objection  to  its  under- 
taking production  is  removed,  since  no  interference  with  the 
freedom  of  action  of  individuals  is  involved. 

In  the  case  of  land,  buildings,  and  other  comparatively 
permanent  kinds  of  wealth,  what  has  practically  to  be  con- 
sidered is  often  not  how  the  State  is  to  be  supplied  with 
them,  but  rather  how  far  it  is  desirable  that  it  should  retain 
possession  of  them.  Much  of  the  land  that  now  belongs  to  the 
public  in  the  form  of  roads,  commons,  forests,  harbours,  &c. 
has  never  been  private  property : other  portions  of  it,  in 
modern  European  communities,  have  been  the  semi-private 
property  of  the  royal  families  in  feudal  and  semi-feudal  times 
and  have  since  gradually  acquired,  more  or  less  completely, 
the  character  of  public  property;  other  portions  have  been 
taken  from  individuals  or  societies  in  the  way  of  confiscation. 
But  however  such  property  may  have  been  obtained,  there  can 
hardly  be  any  valid  reason  for  keeping  it  now,  unless  it  is 
required  for  the  due  performance  of  necessary  governmental 
functions,  or  unless  for  special  reasons  it  is  likely  to  be  more 
useful  socially  under  governmental  management. 

§ 3.  The  greater  part,  however,  of  the  material  provision  for 
the  needs  of  government  has  to  be  obtained  annually  or  from 
time  to  time  by  p':rchase ; and  we  have  now  to  consider  the 
different  soiirces  of  the  funds  for  defraying  such  purchases 
and  also  paying  the  wages  and  salaries  of  the  paid  servants  of 
government. 


CHAP.  VIII 


PUBLIC  FINANCE 


549 


The  chief  sources  are 

(1)  Rent  or  Interest  paid  by  individuals  for  the  use  of 
wealth  that  wholly  or  partially  belongs  to  the  community ; 

(2)  Loans ; 

(3)  Payments  for  commodities*  supplied  by  govern- 
ment ; 

(4)  Taxes  (including  tributes  paid  by  foreigners). 

Such  minor  sources  as  Fines  and  Voluntary  Gifts  are  too 
insignificant — so  far,  at  least,  as  the  main  functions  of  govern- 
ment are  concerned — to  require  more  than  a passing  notice. 

Under  the  first  of  the  four  heads  above  given  will  come,  of 
course,  all  rents  paid  for  land  or  buildings  that  are  completely 
public  property.  But  besides  these,  wherever  land  has  only 
been  allowed  to  pass  into  private  ownership  under  the  condition 
of  a periodical  payment  being  made  to  the  government, — or  of 
services  being  rendered  which  have  afterwards  been  commuted  for 
a pecuniary  payment, — this  payment  should  always  be  regarded, 
from  the  point  of  view  of  distribution,  as  a rent  reserved  by  the 
community  and  not  as  a tax  on  the  owner  of  the  land ; since  in 
taking  it  the  State  does  not  take  from  the  landowner  wealth 
that  has  ever  belonged  to  him,  or  to  which  he  has  any  rightful 
claim.  But  though  this  is  the  true  distributional  view  of  the 
payment,  it  must  be  borne  in  mind  that  if  it  be  projiortioned  to 
the  total  value  or  rent  of  the  land,  it  is  liable  to  have  the  pro- 
ductional  bad  effects  of  a tax  in  the  way  of  checking  agricultural 
improvement.  On  the  other  hand,  a payment  of  this  kind  that 
is  guarded  from  such  effects  is  a most  unobjectionable  mode  of 
raising  funds  for  public  expenditure. 

Interest  on  any  other  wealth  besides  land  has  hardly  a place 
among  the  sources  of  income  of  modern  governments,  though  it 
figures  importantly  among  the  outgoings.  If  they  lend,  it  is 
usually  borrowed  money ; but  their  borrowings  have  been  vast. 
In  many  cases  such  borrowing  is  economically  quite  justifiable ; 
but  the  limits  of  prudent  indebtedness  have  been  found  practi- 
cally difficult  to  observe. 

We  may  say  generally  that  the  conditions  under  which  it  is 
prudent  for  a nation  to  borrow  are,  to  a great  extent,  analogous  to 
those  under  which  it  is  prudent  for  a private  person  to  do  so ; but 


I use  this  term  to  include  services  no  less  than  material  products. 


550 


POLITICAL  ECONOMY 


BOOK  III 


there  are  certain  important  differences.  In  the  first  place,  a nation 
can  borrow  without  incurring  any  but  a very  trifling  burden,  to 
'sybatever  extent  its  obligations  can  be  kept  permanently  current, 
as  a national  medium  of  exchange.  And,  secondly,  in  the  case  of 
a nation,  the  matter  is  complicated  by  the  difference  between 
what  we  may  call  the  strictly  financial  and  the  social  points  of 
view«:  i.e.,  between  the  estimates  of  gain  and  loss  to  the  national 
exchfequer,  and  the  estimates  of  gain  and  loss  to  the  community 
considered  as  an  aggregate  of  individuals.  There  are  two  chief 
cases  in  which  private  borrowing  is  recognised  as  justifiable : 
first,  where  the  loan  is  employed  productively,  so  that  the  addi- 
tional profit  obtained  by  the  use  of  it  supplies  a fund  from 
which  the  interest  may  be  paid,  and  a certain  portion  of  the 
principal  annually  repaid;  and,  secondly,  where  it  is  employed  to 
meet  an  exceptional  necessity  for  enlarged  consumption,  which 
could  not  be  defrayed  without  inconvenience  or  even  suffering 
out  of  the  income  of  a single  year,  so  that  it  is  good  economy  to 
spread  it  over  several  years.  Each  of  these  cases  has  its  coun- 
terpart in  public  finance.  Here,  however,  it  is  not  always  ea.sy  to 
decide  whether  a loan  has  been  employed  productively  for  the 
nation  at  large.  For  the  returns  on  productive  outlay  by 
government  may  take  two  quite  different  forms ; they  ma\' 
either  appear  as  increased  profits  on  some  special  business 
carried  on  by  a governmental  department,  in  which  the  loan 
has  been  employed  as  capital — as  when  (e.^.)  telegraphs  or 
railways  are  bought  for  the  State  with  borrowed  money  : or 
they  may  merely  be  realised  in  the  increased  produce  obtained 
by  the  labour  and  capital  of  the  community  governed — as 
when  a Swiss  canton  borrows  to  make  a road  without  tolls 
for  the  use  of  travellers,  for  which  it  is  repaid  by  the  increased 
earnings  of  its  innkeepers,  tradesmen,  and  agricidtural  pro- 
ducers. This  latter  kind  of  outlay,  however,  even  when  socially 
profitable,  cannot  be  regarded  as  productive  from  a strictly 
financial  point  of  view,  unless  the  government  secures  a share 
of  the  increase  of  national  produce,  sufficient  to  pay  something- 
more  than  the  interest  on  the  loan.  And  it  may  obviously  be 
sometimes  very  difficult  to  say  how  far  any  particular  increase, 
either  in  national  produce  or  in  governmental  receipts,  is  really 
due  to  the  supposed  producti\  e outlay  and  not  to  other  causes 
of  national  prosperity.  Borrowing  for  this  latter  kind  of  exjien- 


CHAP.  VIII 


PUBLIC  FINANCE 


551 


diture,  therefore,  though  often  highly  advantageous,  requires  to 
be  very  carefully  watched. 

Still,  on  the  whole,  the  general  principle  for  determining 
productive  outlay  is  clear,  however  difficult  its  application  may 
be  in  some  instances;  the  increased  receipts  accruing  to  the 
community  in  consequence  of  the  outlay — whether  they  are 
obtained  by  the  community  in  its  corporate  capacity  or  as  an 
aggregate  of  individuals — ought  to  be  more  than  sufficient  to 
repay  the  loan  with  interest  by  the  close  of  the  period  required 
to  exhaust  the  productive  effects  of  the  outlay'.  It 'should  be 
added  that  when  such  borrowing  involves  loss  from 'a  strictly 
financial  point  of  view,  we  have  to  take. into  account — as  against 
any  advantages  that  may  be  expected  from  it  to  the  community 
at  large — all  the  disadvantages  attaching  to  the  part  of  the 
system  of  taxation  that  might  be  dispensed  with  if  the  debt 
were  not  contracted. 

I pass  to  consider  the  second  case  of  legitimate  borrowing ; 
where  the  loan  is  required  to  meet  an  occasional  need' of  extra 
expenditure,  not  positively  productive.  In  this  case  the  rule 
to  be  adopted  appears  primd  facie  very  simple ; it  is  plain 
that  the  number  of  years,  over  which  the  sacrifice  imposed  by 
the  emergency  may  prudently  be  extended,  ought  to  be  limited 
by  the  condition  of  paying  off  the  loan  before  a similar  emer- 
gency may  be  expected  to  occur  again.  Practically,  no  doubt, 
the  exact  application  of  this  principle  in  national  finance  is  a 
matter  of  extreme  difficulty;  since  the  chief  emergencies  which 
necessitate  such  loans  are  foreign  wars  (or  menaces  of  wars) 
and  there  are  no  known  sociological  laws  by  which  we  could 
forecast  the  magnitude  and  frequency  of  a nation’s  future  wars, 
in  the  present  stage  of  civilisation.  Still,  if  we  simply  infer  the 
probability  of  future  wars  from  past  experience,  it  must  be 
admitted  that  the  above-mentioned  principle  has  been  flagrantly 
transgressed  by  most  of  the  leading  nations  of  modern  Europe. 
But  the  alarm  which  such  transgi’ession  might  reasonably 
arouse  may  be  to  some  extent  diminished  by  the  con- 
sideration that  we  may  equally  infer  from  past  experience  a 
probable  reduction  in  the  burden  of  any  national  debt  already 

’ In  some  cases  fixed  capital  may  be  actually  permanent ; but  in  con- 
sideration of  the  frequent  changes  in  industry  it  can  never  be  prudent  to 
reckon  it  as  such. 


552 


POLITICAL  ECONOMY 


BOOK  III 


contracted ; both  an  absolute  reduction  from  the  decline  of  the 
rate  of  interest,  and  a relative  reduction  from  the  increase  of 
the  aggregate  wealth  of  the  borrowing  nation.  At  the  same 
time,  there  is  so  much  uncertainty  in  all  inferences  of  this  kind 
that  I can  hardly  consider  a community  to  be  justified  in 
deliberately  disregarding  the  rule  of  repayment  above  laid 
down ; except,  perhaps,  when  the  taxation  that  would  be  re- 
quired in  order  to  conform  to  this  rule  would  entail  very  serious 
economic  or  political  inconveniences*. 

We  have  already  seen  that  firom  a social  point  of  view 
borrowing  may  be  profitable,  by  increasing  the  aggregate  pro- 
duce of  the  community,  even  though  it  does  not  bring  in  an 
adequate  return  to  government,  either  in  the  form  of  profits 
on  a special  business  in  which  the  loan  is  employed,  or  more 
indirectly  by  an  increase  in  the  yield  of  certain  taxes.  In  such 
a case,  however,  it  is  most  probable  that  the  increase  in  the 
total  income  of  the  community  wdll  not  be  equally  distributed 
among  the  incomes  of  individual  members ; hence,  unless  the 
interest  and  repayment  of  the  loan  can  be  provided  by  imposing 
a rate  on  the  persons  who  gain  by  its  employment,  fairly 
proportioned  to  their  respective  gains,  it  has  a tendency  to 
cause  a new  inequality  in  the  distribution  of  wealth  which 
ought  to  be  considered  in  adjusting  the  general  burden  of 
taxation. 

There  is  another  less  obvious  disturbance  of  pre-existing 
distribution  which  borrowing,  whether  for  profitable  outlay  or  to 
ward  off  calamities,  tends  to  bring ; namely,  by  raising  the  rate 
of  interest,  and  thereby  increasing  the  share  of  the  aggregate 
produce  that  falls  to  capital.  Where  the  outlay  is  of  the 
profitable  kind  it  is  not  necessary  that  this  increase  should 

’ I have  not  space  to  discuss  adequately  different  modes  of  national  borrow- 
ing : but  I may  briefly  note  the  wastefulness  of  borrowing  in  such  a way  that 
the  amount  received  is  less  than  the  debt  incurred ; since  this  method  renders 
the  borrowing  nation  unable  to  take  advantage  of  any  subsequent  fall  in  the 
rate  of  interest,  except  at  a serious  loss.  It  may  be  said  that  it  gives  a cor- 
responding security  to  the  lenders,  so  that  what  the  nation  loses  in  one  way 
will  be  compensated  by  its  obtaining  the  loan  on  otherwise  more  favourable 
terms : but  the  security  to  the  lenders  is  an  indefinite  and  (if  I may  be  allowed 
the  phrase)  insecure  one,  and  therefore  likely  to  be  undervalued.  If  a security 
of  this  kind  is  to  be  given  at  all,  it  is  more  economical  for  the  nation  to 
guarantee  its  creditors  against  repayment  for  a certain  period, — or  for  a period 
varying  within  definite  limits,  the  variations  being  determined  by  lot. 


CHAP.  VIII 


PUBLIC  FINANCE 


553 


be  accompanied  by  a diminution  in  the  re^vard  of  labour ; as  it 
is  possible  that  it  may  be  entirely  supplied  from  the  increase  in 
the  aggi-egate  produce.  But  in  the  case  of  loans  for  wars  or 
similar  purposes,  the  gain  to  capitalists  from  the  rise  of  interest 
inevitably  involves  a corresponding  loss  to  labour,  supposing 
that  the  capital  is  supplied  by  the  members  of  the  borrowing 
community,  and  that  it  would  in  any  case  have  been  saved  and 
invested  in  some  branch  of  home  industry.  These  suppositions, 
however,  can  rarely  altogether  correspond  to  the  facts ; and  so 
far  as  the  capital  borrowed  is  obtained  from  abroad,  or  would 
otherwise  have  been  sent  abroad  for  investment,  it  is  quite 
possible  that  the  immediate  effect  of  the  borrowing  may  be 
pecuniarily  advantageous  both  to  capitalists  and  labourers ; 
both  interest  and  wages  within  the  community  being  tempo- 
rarily increased  by  the  loan.  Thus  the  first  years  of  a war 
supported  by  borrowing  may  be  generally  felt  as  years  of 
prosperity.  The  day  of  reckoning  must  of  course  come  for  this 
expenditure ; and  the  account  must  ultimately  be  paid  in  part 
from  the  share  of  labour,— unless  the  interest  on  the  war-loan 
is  supplied  by  taxes  falling  entirely  on  capitalists. 

§ 4.  In  considering  the  different  occasions  for  govern- 
mental borrowing,  we  have  incidentally  noticed  that,  while  the 
major  part  of  the  ordinary  income  of  governments  is  derived  from 
taxes,  a certain  portion  is  actually  in  most  civilised  countries 
obtained  from  payments  for  the  products  of  governmental 
industry,  purchased  freely  by  the  individuals  who  need  them, 
just  as  the  commodities  provided  by  private  industry  are  pur- 
chased. It  will  be  convenient  to  distinguish  these  payments 
as  “ earnings  ” of  government.  Such  “ earnings  ” may  be  classed 
under  two  heads,  for  the  purposes  of  the  present  discussion.  In 
some  cases  they  are  obtained  by  selling  products  or  services  at 
their  market-value,  determined  by  the  competition  of  private 
industries,  as  (e.g.)  where  a government  possesses  domain-lands 
and  sells  the  agi-icultural  products  obtained  by  cultivating  them, 
or  similarly  sells  wood  out  of  its  forests,  &c.‘  In  other  cases 
governments  have  established  for  themselves  a monopoly  in 

1 We  may  also  include  under  this  head  the  case  of  industries  undertaken  by 
government  for  the  sole  purpose  of  supplying  government  itself  with  certain 
products  : where,  therefore,  there  are  no  “earnings”  in  the  ordinary  sense  of 
the  term. 


554 


POLITICAL  ECONOMY 


BOOK  III 


certain  branches  of  industry,  either  to  secure  the  full  economic 
gain  obtainable  by  organising  the  industry  under  a single 
management,  or  for  the  better  prevention  of  fraud,  or  some- 
times with  a view  to  taxation.  In  Great  Britain  the  only 
business  thus  monopolised,  besides  coinage,  is  that  of  conveying 
letters  and  telegrams ; in  other  countries  various  other  in- 
dustries are  similarly  conducted,  as  (e.y.)  certain  kinds  of 
mining,  the  manufacture  and  sale  of  tobacco,  opium,  even 
lottery-tickets. 

The  financial  problem  is  obviously  very  different  in  cases  of 
the  first  and  second  class  respectively.  When  the  price  of  the 
commodity  sujiplied  by  the  government  is  determined  by  open 
competition  with  private  industries,  the  only  question  is  whether 
the  government  ought  to  carry  on  the  business  at  all ; whether 
it  would  not  be  more  economically  managed  if  handed  over  to 
private  capitalists.  In  ordinary  circumstances,  this  question 
may  be  decided  by  a mere  calculation  of  the  financial  profit  of 
the  governmental  business : but,  as  we  have  seen,  there  are  cases 
where  it  may  be  desirable  that  government  should  carry  on  a 
certain  branch  of  industry  under  unremunerative  conditions,  for 
the  sake  of  some  general  utility  which  the  competitive  system 
cannot  be  trusted  to  provide. 

Where,  on  the  other  hand,  the  industry  is  protected  by 
a monopoly,  there  is  more  difficulty  in  determining  what  shall 
be  the  amount  and  price  of  the  commodities  supplied.  A pri- 
vate monopolist  may  be  assumed  to  aim  at  the  greatest  net 
gain  to  himself:  and  a governmental  monopoly  ought  clearly  to 
be  managed  on  the  same  principle,  .so  far  as  it  is  considered 
strictly  from  a financial  point  of  view,  as  a means  of  obtaining 
money  for  governmental  purposes.  And  though  this  ought  never 
to  be  the  sole  consideration  for  a government — since  it  has  to 
regard  the  interests  of  those  of  its  subjects  who  buy  the  monojio- 
lised  commodity,  and  any  others  who  are  indirectly  affected  by 
its  use — still  there  are  cases  in  which  the  financial  view  may 
reasonably  be  allow'ed  to  prevail ; as,  for  in.stance,  where  the 
commodity  monopolised  is  a dangerous  luxury.  Even  in  other 
cases  it  may  be  on  the  whole  expedient  to  keeji  the  price  of  the 
monopolised  commodity  above  the  point  that  it  would  otherwise 
reach,  foi'  the  sake  of  the  profit  to  the  treasure  But  when  this 
is  done,  it  is  clear  that  the  purchasers  of  the  commodity  are 


CHAP.  VIII 


PUBLIC  FINANCE 


55r> 

substantially  taxed  for  the  benefit  of  their  fellow  citizens : in 
fact  the  establishment  of  a monopoly  is  a recognised  mode  of 
raising  a tax  on  an  article  of  consumption*.  On  the  other  hand, 
if  the  price  be  reduced  below  a certain  point,  a special  bounty  is 
confen-ed  on  the  purchasers  at  the  expense  of  the  rest  of  the 
community.  It  is  not,  however,  quite  clear  at  what  point 
government  ought  to  fix  the  price,  if  it  would  avoid  burdening 
one  part  of  the  community  for  the  benefit  of  the  other. 

(1)  It  is  thought  by  some  that  the  desired  impartiality  will 
be  realised,  if  government  sells  the  commodity  at  the  lowest 
price  which  allows  interest  on  the  capital  employed  at  the  rate 
at  which  government  could  borrow  it,  after  paying  all  the  cur- 
rent expenses  of  production,  including  the  remuneration  of  all 
the  officials  employed  and  allowance  for  depreciation  of  capital. 
For — it  is  said — if  the  national  exchequer  gains  by  the  business, 
the  extra  price  that  provides  the  gain  is  substantially  a tax  on 
those  who  purchase  the  commodity  for  the  benefit  of  the  rest  of 
the  community : while,  if  it  loses,  the  community  is  taxed  for 
the  benefit  of  these  particular  purchasers.  There  ought,  therefore, 
to  be  neither  gain  nor  loss. 

But  (2)  it  appears  to  me  more  strictly  true  that  government 
avoids  interfering  with  distribution,  if  it  sells  the  commodity  at 
the  price  at  which  it  would  be  sold  if  provided  by  private  in- 
dustry. This  price,  however,  may  possibly  be  higher  than  that 
at  which  government  could  supply  it  without  gain  or  loss;  since 
the  article  may  be  one  which  either  would  be  less  economically 
supplied  under  the  conditions  of  free  competition,  on  one  or 
other  of  the  grounds  explained  in  chapter  ii.  of  this  Book,  or 
would  be  practically  monopolised.  In  this  case  I should  urge 
that  the  advantage  which  the  community  gains  through  the 
business  being  undertaken  by  government  is  one  to  which  the 
particular  purchasers  of  the  article  have  no  claim ; and  that, 
therefore,  if  the  price  of  the  article  is  reduced,  in  the  interest  of 
production,  the  reduction  ought  to  be  regarded  as  a special 
benefit  to  them,  for  which  allowance  would  have  to  be  made 
in  a perfectly  fair  adjustment  of  the  whole  .system  of  taxation. 

' Tliin  mode  of  taxation  has  obvious  drawbacks,  except  where  the  production 
of  the  article  is  specially  adapted  for  governmental  management : but  it  has 
important  advantages  in  some  cases,  especially  in  diminishing  the  cost  and 
trouble  of  preventing  evasions  of  the  tax. 


556 


POLITICAL  ECONOMY 


BOOK  III 


I admit,  however,  that  the  criterion  which  I regard  as  the  true 
one  cannot  easily  be  made  exact ; since  in  ordinary  circum- 
stancet-  we  can  only  conjecture  roughly  the  price  at  which  any 
commoQicy  would  be  supplied  by  private  industry. 

But  further:  I have  hitherto  spoken,  for  simplicity,  as  if 
there  were  only  one  product  to  be  considered : but  in  important 
cases  the  practical  problem  is  to  fix  a scale  of  prices  for  a number 
of  different  commodities,  supplied  under  different  economic  con- 
ditions as  regards  both  cost  and  demand.  Thus  {e.g.)  a railway 
provides  conveyance  suitable  for  different  classes  of  persons, 
and  for  different  kinds  of  things  varying  in  the  proportion  of 
weight  to  bulk,  and  in  the  degree  of  care  required  for  safe  con- 
veyance : and  it  conveys  persons  and  things  through  a great 
variety  of  distances.  On  what  principle,  then,  are  the  prices  of 
these  different  commodities  to  be  determined  in  this  and  similar 
cases  ? This  question  is  often  answered  by  saying  that  price 
should  be  proportioned  to  cost : but  the  simplicity  of  this  answer 
ignores  the  normal  influence  of  demand  on  price,  the  varying 
intensity  of  the  respective  demands  for  the  different  commodities, 
and  the  great  difference  between  (a)  the  total  expense  of  sup- 
plying the  aggi’egate  of  commodities  and  (6)  the  sum  of  the 
additional  expenses  entailed  by  each  element  of  the  aggregate, 
when  considered  separately  as  an  optional  addition  to  the  rest. 
This  last  consideration  is  conspicuously  exemplified  in  the  case 
of  a railway : since  the  greater  part  of  the  annual  expense  of  a 
railway — including  interest  on  the  initial  outlay — does  not  vary 
materially  with  the  amount  of  traffic ; and  even  the  average 
additional  cost  of  each  service  of  conveyance  does  not  bear  a 
fixed  ratio  to  the  amount  of  utility  furnished,  but  genei-ally 
a ratio  that  decreases  as  the  whole  amount  of  utility  furnished 
increases.  Now  it  is  the  interest  of  the  community  as  a whole 
that  the  total  amount  of  utility  produced  by  the  railwa}'  should 
be  increased,  so  long  (1)  as  each  extra  service  more  than  pays 
its  own  extra  cost  and  (2)  the  total  cost  is  met  by  the  aggregate 
of  payments  received  ; provided  that  this  total  cost  is  distributed 
among  the  different  payments  received  in  such  a manner  as  to 
keep  the  aggregate  demand  for  the  commodities  furnished  as 
great  as  possible.  If  the  demands  for  all  species  of  such  com- 
modities were  equally  extensible,  it  would  be  economically 
advantageous — as  well  as  obviously  fair  fi’om  the  point  of  view 


CHAP.  VIII 


PUBLIC  FINANCE 


557 


of  individual  purchasers — that  each  payment  should  bear  a 
share  of  the  total  expenses  corresponding  to  the  extra  cost  of 
the  commodity  paid  for.  But  as  in  fact  these  demands  are  liable 
to  be  very  unequal  in  extensibility,  it  may  be  necessary  for  the 
most  economic  management  of  the  business  that  the  unvarying 
element  of  the  total  expenses  should  be  distributed  unequally 
among  the  different  pa3Tnents : the  greater  share  being  borne 
by  those  species  of  commodities  for  which  the  demand  is  less 
reducible  by  a rise  in  price  and  the  smaller  share  by  those  for 
which  the  demand  is  more  reducible.  Accordingly  I hold  that 
in  the  governmental  management  of  such  branches  of  production 
inequalities  in  the  charges  for  different  commodities,  based  on 
differences  of  demand  and  not  of  cost,  are  quite  legitimate ; 
though  they  certainly  involve  inequalities  in  the  treatment 
of  different  sets ' of  consumers,  which  ought  to  be  somehow 
compensated  in  an  ideally  exact  adjustment  of  the  pecuniary 
burdens  imposed  by  government.  But  it  should  be  observed 
that  similar  inequalities  are  in  other  Avays  inseparable  from 
the  most  economic  management  of  governmental  monopolies : 
e.g.,  the  simplicity  of  our  penny  post  is  doubtless  economical  on 
the  whole,  but  it  certainly  makes  the  internal  correspondence  of 
London  pay  for  the  correspondence  between  remote  parts  of 
the  kingdom. 

On  similar  grounds,  the  general  principle  of  “differential  rates” 
must,  I conceive,  be  admitted  as  legitimate,  in  the  regulation  by 
government  of  railways  under  joint-stock  management ; so  far 
as  it  can  be  shewn  that  a closer  correspondence  of  price  with 
cost  would  really  render  the  railway  less  useful  on  the  whole. 
The  aim  of  government  should  be  to  prevent  the  supply  of 
commodities  that  it  regulates  from  being  scanty  and  dear,  but 
not  necessarily  to  prevent  the  commodities  from  being  unequally 
priced. 

I do  not  mean  to  say  that  a private  company  should  be  left 
altogether  unchecked  in  the  arrangement  of  such  differential 
rates,  on  the  ground  that  its  private  interests  in  this  matter  will 
always  coincide  with  the  interests  of  the  public.  Such  a universal 
coincidence  cannot  be  affirmed : indeed  a possible  divergence 
between  the  two  becomes  manifest  when  we  consider  that  one 
main  cause,  in  the  case  of  a railway,  of  the  differences  of  demand 
above-mentioned  is  the  partial  competition  of  other  railways  and 


558 


POLITICAL  ECONOMY 


BOOK  III 


steamships — a competition  which  is  often  effective  for  certain 
long  distances  while  leaving  a multitude  of  shorter  distances 
unaffected.  It  might  be  for  the  private  interest  of  a railway 
company  to  make  temporary  reductions  of  price,  which  could 
not  be  permanently  maintained  without  economic  loss,  in  order 
to  win  in  such  a competitive  struggle : but  it  can  rarely  be  the 
interest  of  the  community  that  government  should  do  this  or 
allow  it  to  be  done. 

Sometimes,  indeed,  it  may  be  on  special  grounds  the  real 
interest  o*  the  community,  considered  as  an  aggregate  .of  indi- 
viduals, th.io  a commodity  furnished  by  government  should  be 
supplied  at  a price  financially  unremunerative : even,  it  may 
be,  at  a price  that  will  not  yield  ordinary  interest  on  the  capital 
employed.  Indeerl  if  this  capital  were  not  borrowed,  and  if  we 
had  not  to  consider  the  need  of  raising  supplies  for  other  branches 
of  governmental  expenditure,  there  would  seem  to  be  no  reason 
why  the  condition  of  paying  interest  should  be  regarded  at  all, 
any  more  than  it  would  be  regarded  in  a community  socialistically 
organised  ; it  would  be  economically  advantageous  to  extend  the 
supply  of  the  commodity  by  cheapening  its  price  so  long  as  it 
more  than  repaid  the  total  cost  of  the  labour  spent  in  furnishing 
it — including  the  labour  required  for  keeping  in  repair  and 
duly  improving  the  instruments  used  in  the  business.  But 
since  actually  any  portion  of  national  income  sacrificed  in  this 
way — by  a reduction  of  price  below  what  would  have  to  be  paid 
apart  from  governmental  interference— must  be  made  iqj  by 
taxation,  it  will  only  be  desirable  to  make  such  a reduction 
where  it  is  important  for  the  community  genei'ally  that  the 
commodity  in  question  should  be  widely  used, — as  {e.g.)  in  the 
case  of  education. 

§ 5.  The  discussion  in  the  preceding  section  has  illustrated 
a s])ecial  difficulty  in  drawing  the  line  between  “ earnings  of 
“ government  ” and  “ taxes.”  We  have  now  to  observe  that  the 
general  distinction  between  these  two  terms  is  not  quite  so  clear 
as  it  appeal’s  at  first  sight.  No  one,  I suppose,  would  apply  the 
term  “ taxes  ” to  payments  for  goods  or  services  furnished  by 
government  which  the  payer  is  left  perfectly  fi'ee  to  take  or  to 
leave, — except  so  far  as  the  price  of  the  service  is  materially 
raised  by  the  governmental  monopoly, — even  where,  if  the  com- 
modities are  jjurchased  at  all,  they  must  be  purchased  from  the 


CHAP.  VIII 


PUBLIC  FINANCE 


559 


government,  as  in  the  case  of  payments  for  postal  services.  But, 
if  so,  it  seems  doubtful  whether  a payment  of  this  kind  acquires 
the  character  of  a tax  merely  because  it  is  made  compulsory ; 
as,  for  instance,  where  landowners  are  compelled  to  take  a share 
in  the  cost  of  works  of  drainage  or  irrigation  carried  on  by 
government.  On  the  other  hand,  some  economists  hold  that 
all  taxes — -i.e.,  all  compulsory  contributions  of  individuals  to  their 
government — ought  to  be  regarded  as  payments  for  services  re- 
ceived ; and  that  the  burden  of  taxation  ought  to  be  distributed 
on  the  principle  which  is  ordinarily  accepted  in  the  case  of  such 
payments,  namely,  that  every  individual  should  pay  in  proportion 
to  the  cost  or  utility*  of  the  services  rendered  to  him.  And'  I 
quite  admit  that  this  is  the  most  consistent  way  of  treating  the 
problem  of  taxation  from  an  individualistic  point  of  view,  so  far 
as  the  services  rendered  by  government  admit  of  being  thus 
individualised.  But  I find  it  to  a great  extent  impossible  to 
apply  this  principle  in  the  case  of  the  most  important — and 
actually  most  costly — functions  of  government  Take  {e.g.)  the 
case  of  defence  against  foreign  foes : modern  ware  are  under- 
taken not  mainly  for  protection  of  the  life  and  property  of  indivi- 
duals, but  for  the  maintenai  e of  national  existence,  extension  of 
empire,  &c. ; and  it  is  surel_y  impossible  to  apportion  the  advan- 
tages thus  purchased  among  the  individual  members  of  the 
community.  Similarly,  how  are, we  to  decide  who  profits  by  the 
sumptuous  expenditure  of  the  monarch  and  the  royal  family  in  a 
monarchical  country  ? It  would  be  going  too  fai'  to  affirm  that 
all  members  of  the  nation  are  equally  concerned  in  maintaining 
either  its  international  position,  or  its  monarchical  constitution ; 
still  I cannot  but  regard  as  hopeless  the  attempt  to  apportion 
the  cost  of  either  among  different  classes  on  the  principle  of 
payment  in  proportion  to  services  rendered.  I hold,  therefore, 
that  at  any  rate  for  the  taxation  required  to  defray  the  expenses 
of  the  Court,  and  of  the  army  and  navy  and  diplomatic  service, 
and  the  interest  on  national  debts  incurred  for  warlike  purposes, 
some  other  principle  of  distribution  must  be  sought. 

The  case  is  different  with  the  expense  of  the  administration 
of  justice  and  the  police.  But  though  both  judges  and  policemen 

* I say  “cost  or  utility”  because  the  divergence  between  the  two,  and  the 
difficulty  of  deciding  to  what  extent  and  in  what  manner  both  are  to  be  taken 
into  account,  are  often  overlooked. 


560 


POLITICAL  ECONOMY 


BOOK.  Ill 


are  continually  engaged  in  rendering  special  services  to  certain 
individuals,  there  is  much  force  in  the  contention  of  Bentham 
and  Mill',  “that  those  who  are  under  the  necessity  of  going  to 
“law  are  those  who  benefit  least,  not  most,  by  the  law  and  its 
“administration.”  It  may  be  expedient,  indeed,  in  order  to 
check  litigation,  that  the  cost  of  administering  justice  should  fall 
largely  on  individuals ; as  is  actually  the  case  so  far  as  the  ser- 
vices of  solicitors  and  barristers  are  paid  by  the  litigants.  But 
it  is  at  any  rate  desirable  that  as  little  as  possible  of  this 
expense  should  fall  on  innocent  individuals — innocent,  that  is, 
not  only  of  violation  of  rights  but  even  of  undue  litigiousness.  It 
seems  clear,  therefore,  that  the  support  of  the  judicature  and  the 
police  cannot,  at  least  in  the  main,  be  defrayed  by  fees  from  the 
persons  whom  judges  and  policemen  are  more  obviously  occupied 
in  protecting.  At  the  same  time,  I do  not  think  that  the  prin- 
ciple of  apportioning  the  taxpayer’s  contribution  to  the  services 
which  he  receives  is  so  completely  inapplicable  here,  as  it  is  in 
the  case  of  taxes  for  national  defence : indeed  we  must,  I think, 
have  recourse  to  it  to  a certain  extent  when  we.  come  to  deal 
with  the  question  of  determining  the  area  of  incidence  of 
taxation. 

The  ordinary  answer  to  the  question,  as  to  the  persons  “who 
“ought  to  pay  taxes  to  a government”  is  Adam  Smith’s, — “the 
“subjects  of  the  state”  governed;  but  when  the  same  question 
is  raised  in  reference  to-  a local  tax,  the  ordinary  answei'  is  “ the 
“ persons  residing  or  possessing  property  in  the  district  ” ; and  a 
comparison  of  the  two  answer  j shews  the  need  of  qualifying  the 
first.  It  seems  clearly  just  that  aliens  residing  or  possessing 
property  in  any  country  should  pay  something  towards  the 
expenses  of  its  government ; and  if  so,  unless  aliens  are  to  be 
fined  as  such,  it  is  clearly  just  that  they  should  pay  propor- 
tionally less  to  their  own  government ; and  the  only  satisfactory 
way  of  determining  the  ratio  in  which  their  contribution  ought 
to  be  divided  between  the  two  governments  is  by  regarding  it  as 
a price  paid  for  services  received.  An  Englishman  residing  in 
France  is  much  less  concerned  than  a Frenchman  with  French 
expenditure  on  armaments ; but  he  has  as  much  interest  as  a 
Frenchman  has  in  the  expenditure  for  maintaining  internal 


1 Mill,  Political  Economy,  Book  vi.  c.  vi.  § 3. 


CHAP.  VIII 


PUBLIC  FINANCE 


561 


order  and  jiromoting  well-being  in  France ; and  he  is  also 
benefited  by  this  latter  outlay  if  without  residing  in  France 
he  merely  holds  property  there.  It  seems,  therefore,  most 
proper  that  at  least  a rough  division  should  be  made  of  the 
taxes  ordinarily  paid  by  an  English  capitalist  into  three  parts ; 
one  part  to  be  paid  by  him  to  the  English  government  wherever 
he  may  reside  or  hold  property ; another  to  the  government  of 
the  country  in  which  he  resides;  while  the  third  should  be 
proportioned  to  the  property  that  he  enjoys  under  the  protec- 
tion of  his  own  or  any  other'state. 

The  same  principle,  again,  may  be  applied — -and  actually 
has  been  applied  to  a considerable  extent — in  determining  the 
division  between  general  and  local  taxation  within  any  country. 
Where  expenditure  defrayed  by  taxes  benefits  the  inhabitants 
in  a certain  locality  almost  exclusively,  and  other  persons  only 
so  far  as  they  resort  to  the  place — thereby  usually  benefiting  its 
trade — it  is  manifestly  just  that  the  taxes  should  be  correspon- 
dingly localised;  as,  for  instance,  in  the  case  of  expenditure  on 
streets,  and  bridges  so  far  as  they  are  not  maintained  by  tolls. 
Where,  on  the  other  hand,  a more  considerable  share  of  the 
utilities  produced  tends  to  be  diffused  through  the  community, 
though  residents  in  a certain  locality  benefit  more  than  others, 
a division  of  the  cost  between  local  and  general  taxation  is  on 
similar  principles  equitable:  thus  {e.g.)  it  is  reasonable  that  the 
pecuniary  aid  given  by  government  to  elementary  education 
should  be  furnished  partly  from  national,  partly  from  local,  re- 
sources, as  far  as  it  is  given  on  strictly  individualistic  principles 
— that  is,  with  the  view  of  benefiting  persons  other  than  the 
children  educated.  A similar  division  of  cost  would  seem  to 
be  also  equitable  in  the  case  of  poor-relief;  but  here  considera- 
tions of  justice  appear  to  be  overborne  in  England  by  the 
special  need  and  difficulty  of  maintaining  a very  strict  economy 
in  poor-law  administration. 

To  sum  up : I do  not  think  that  any  sharp  line  can  be 
drawn  between  taxes,  ordinarily  so  called,  and  any  compulsory 
pa^unents  for  services  received  from  government ; and  I accept 
generally  the  principle  of  fixing  the  amount  of -the  individual’s 
contribution  to  government  so  as  to  correspond  as  closely  as 
•economic  management  allows  to  the  cost  of  the  services  rendered 
by  government  to  him,  so  far  as  such  services  can  properly  be 

s.  p.  E.  36 


562 


POLITICAL  ECONOMY 


BOOK  III 


regarded  as  rendered  to  individuals.  At  the  same  time,  I think 
that  this  principle  can  rarely  be  applied,  except  in  a rough  and 
partial  way,  to  any  payments  that  are  ordinarily  called  taxes : 
and  that  even  where  it  is  most  applicable,  it  must  often  be  o\  er- 
borne  by  other  considerations, — sometimes  by  the  economic 
advantage  of  more  uniform  rates  of  payment,  sometimes  by  the 
desirability  of  reducing  the  burden  laid  on  the  poorer  class  of 
contributors.  Nor  does  it  seem  that  there  is  necessarily  any 
sacrifice  of  justice,  even  from  an  individualistic  point  of  view,  in 
throwing  a part  of  the  cost  of  services  which  men  are  compelled 
to  purchase  on  jjersons  other  than  the  recipient;  since  from  this 
point  of  view  the  only  admissible  reason  for  compelling  any  in- 
dividual to  jjurchase  such  services  is  that  the  interests  of  othei-s 
will  be  damagefl  if  he  is  allowed  to  dispense  with  them,  and 
hence  it  seems  not  unfair  that  these  others  should  bear  a part  of 
their  cost.  And,  finally,  there  is  a large  part  of  governmental 
expenditure — much  the  largest  jiart  in  our  European  nations, 
loaded  with  war  debts,  and  armed  to  the  teeth — the  utility  of 
which  cannot  be  thus  distributed  among  individuals.  Let  us 
proceed  then  to  consider  the  method  by  which  government 
ought  to  raise  the  contributions  required  for  such  public  ex- 
penditure as  cannot  reasonably  or  conveniently  be  provided 
for  by  charging  individuals  in  proportion  to  services  rendered; 
so  far  as  there  is  no  pTiblic  income  adequate  to  such  needs 
derived  fi’om  land  or  other  wealth  owned  by  the  community 
or  fi’om  the  profits  of  governmental  business.  It  will  be  con- 
venient to  call  this  the  method  of  “taxation”  in  the  strictest 
sense. 

I 6.  I ought,  however,  to  premise  that  in  the  discussion 
which  follows  I do  not  propose  to  deal  with  the  problem  of 
constructing  a system  of  taxation,  as  it  presents  itself  ])ractically 
to  a statesman.  It  does  not  seem  to  me  that  this  problem  can 
be  satisfactorily  treated  in  a work  on  general  economic  theory ; 
especially  because,  as  I shall  shew,  the  considerations  that  ought 
to  influence  a statesman  in  choosing,  rejecting,  or  adjusting 
particidar  taxes  are  very  various  and  complicated ; and  though 
we  may  usefully  explain  and  classify  them  in  a general  theo- 
retical discussion,  we  cannot  pretend  to  estimate  precise!}'  their 
relative  importance  without  careful  ascertainment  of  the  par- 
ticular social  and  industrial  conditions  of  the  community  to  be 


CHAP.  VIII 


PUBLIC  FINANCE 


563 


taxed.  Indeed  there  are  very  important  political  reasons 
for  preferring  some  taxes  to  others,  and  for  seeking  to 
realise  certain  ends  in  taxation  generally,  'which  lie  beyond  the 
scope  of  a strictly  economic  discussion.  Thus  the  second  of 
Adam  Smith’s  famous  canons — that  “ the  tax  which  each 
“ individual  is  bound  to  pay  ” ought  to  be  “ clear  and 
“ plain  to  the  contributor  ” in  respect  of  time,  manner,  and 
quantity — is  a constitutional  rather  than  an  economic  principle: 
its  primary  object  being,  as  Adam  Smith  explains,  to  protect 
ordinary  citizens  against  illegitimate  exactions  and  extortions  on 
the  part  of  officials.  So  again,  in  a community  where  represen- 
tative institutions  are  fully  developed,  there  is  an  important  con- 
stitutional ground  for  maintaining  equal  diffusion  of  the  burden 
of  taxation  ; namely,  in  order  that  the  citizens  generally  may  be 
equally  interested  in  checking  superfluous  governmental  expen- 
diture which  special  classes  of  persons  are  continually  prompted 
by  strong  selfish  motives  to  extend.  Indeed  the  force  of  this 
consideration  has  led  some  thinkers  to  hold  seriously  that  the 
burden  of  taxation  ought  to  be  as  much  as  possible  felt  by 
those  who  bear  it,  in  order  that  they  may  have  the  strongest 
possible  motives  for  minimising  it ; and  perhaps  in  a very 
orderly  and  law-abiding  and  lightly-taxed  community  this 
might  be  desirable  : but  in  most  actual  societies  the  dangers 
arising  from  “ ignorant  impatience  ” of  taxation  are  so  much 
graver  than  any  which  “ ignorant  j^atience  ” could  cause,  that  it 
should  rather  be  a maxim  of  statesmanship  to  avoid  if  possible 
any  species  of  tax  that  is  particularly  disliked  by  the  persons  on 
whom  it  falls,  even  if  the.  dislike  seems  groundless  and  fancifuP. 
Further,  it  hardly  seems  within  my  province  to  deal  with  the 
very  important  political  question,  how  far  a statesman  in  con- 
structing a scheme  of  taxation  ought  to  take  a cosmopolitan 
point  of  view,  and  not  try  to  throw  the  burden  of  a tax 
on  foreigners,  except  so  far  as  it  is  fair  compensation  for  services 
rendered  to  them,  nor,  in  estimating  injurious  effects  on  pro- 
duction, consider  detriment  to  foreig'n  industries  as  indifferent 
— or  even  advantageous,  if  they  rival  industries  of  his  own 
country.  In  a previous  chapter  (ch.  v.),  however,  we  have  had 

1 It  should  be  noted  that  there  are  also  strictly  economic  grounds  for  this 
maxim,  so  far  as  dislike  of  a tax  causes  it  to  be  evaded,  legitimately  or  other- 
wise. 

36—2 


564 


POLITICAL  ECONOMY 


BOOK  III 


occasion  to  examine  the  manner  in  which  a “ tribute  ” may,  in 
certain  circumstances,  be  obtained  from  foreigners  by  means 
of  import  duties ; and  I shall  refer  to  the  subject  again  in  a 
subsequent  section : but  for  the  most  part  I shall  assume,  for 
simplicity,  that  the  burden  of  a tax  is  borne  by  the  nation 
whose  government  imposes  it. 

In  considering  more  particularly  the  mode  of  imposition  of 
this  burden,  it  will  be  desirable  to  keep  in  view  our  fundamental 
distinction  between  effects  on  Production,  or  on  the  aggregate 
wealth  of  the  community,  and  effects  on  Distribution,  or  the 
incidence  of  the  burden  of  taxation ; though,  as  we  shall  see,  it 
is  impossible  to  separate  the  consideration  of  the  one  kind  of 
effects  from  that  of  the  other.  Under  the  former  head,  the 
financier  is  chiefly  concerned  with  effects  which  he  would  desire 
to  avoid  as  far  as  possible^  namely,  the  different  extra  costs  of 
different  taxes — the  burden  they  impose  on  the  taxpayers,  over 
and  above  the  net  gain  that  they  bring  in  to  the  treasury. 
In  estimating  these  we  have  to  distinguish  between  the  strictly 
financial  cost — the  expense  of  collection — and  what  may  be 
called  the  extra-financial  cost,  i.e.,  chiefly  the  loss  entailed  on 
the  consumers  by  changes  in  jiroducts  or  modes  of  production 
caused  by  taxes.  The  discussion  of  the  former  kind  of  cost, 
and  of  the  best  methods  of  minimising  it,  belongs  to  the 
technical  side  of  financial  administration,  and  I shall  not  enter 
upon  it  further  than  to  notice  one  or  two  considerations,  so 
fundamentally  important  in  constructing  a system  of  taxation 
that  they  can  hardly  be  omitted : what  I shall  chiefly  consider, 
under  the  head  of  “ effects  on  production,”  are  the  changes  in 
the  extra-governmental  organisation  of  industry  which  the 
financial  interference  of  government  entails. 

It  is,  however,  with  the  problem  of  distribution  that  we  are 
primarily  concerned,  when  treating  of  taxation  in  the  most 
general  way.  Effects  on  production  are  properly  regarded  in 
relation  to  particular  taxes  taken  by  themselves ; since  a tax 
that,  fi’om  the  point  of  view  of  production,  is  bad  when  con- 
templated by  itself,  remains  no  less  bad  when  contemplated  as 
part  of  a complex  system  of  taxation ; it  may  be  eligible  as  the 

1 Not,  however,  altogether;  e.g.,  we  may  take  into  account  the  indirect  gain 
that  results  from  the  restriction  of  the  consumption  of  harmful  luxuries. 


CHAP.  VIII 


PUBLIC  FINANCE 


565 


least  bad  among  possible  alternatives,  but  its  badness  cannot  be 
neutralised  by  combining  it  with  other  taxes.  But  the  case  is 
otherwise  with  effects  on  distribution ; for  when  a tax  is 
defective  on  account  of  the  unequal  distribution  of  its  burden, 
the  defect  can  be  at  least  roughly  compensated  by  the  imposi- 
tion of  some  other  tax  with  an  opposite  kind  of  inequality — 
and,  as  we  shall  see,  such  rough  compensation  is  all  that  the 
financier-  can  practically  aim  at.  Hence,  in  considering  taxatii  u 
in  the  aggregate,  the  question  of  disti-ibution  is  the  primary 
one : and,  conversely,  in  considering  the  right  distribution  of 
the  burden  of  taxation,  we  are  concerned  primarily  with 
taxetion  in  the  aggregate,  and  only  secondarily  with  particular 
taxes. 

§ 7.  On  what  principles  then  are  we  to  distribute  the 
burden  of  taxation  in  the  narrower  sense,  that  is,  the  burden 
that  remains  to  be  allotted,  when  the  principle  of  payment 
in  proportion  to  services  received  has  been  applied  as  far  as 
is  reasonable  ? The  first  point  to  settle  is  whether  we  should 
make  taxation  a means  of  redressing  the  inequalities  of  in- 
come that  would  exist  apart  from  governmental  interference. 
There  is  a weighty  economic  objection  to  this  on  account  of 
the  danger  of  diminishing  the  inducements  to  accumulation  of 
capital,  or  driving  it  abroad*, — a danger  much  greater  here  than 
in  the  case  of  the  partially  distributional  interferences  noticed 
at  the  close  of  the  preceding  chapter,  because  if  the  principle 
of  redressing  inequalities  is  applied  at  all,  any  limit  to  its 
application  seems  quite  arbiti-ary ; if  the  burden  of  the  rich  is 
to  be  twice  as  great  as  that  of  the  poor,  there  seems  no  clear 
reason  why  it  should  not  be  three  times  as  great,  and  so  on. 
I hold,,  therefore,  that  the  general  aim  of  a statesman  in 
distributing  taxation  should  be  to  impose,  as  nearly  as  possible, 
equal  sacrifices  upon  all.  But  this  rule  requires  some  very 
important  qualifications.  In  the  first  place,  I think  it  must  be 
interpreted  so  as  not  to  conflict  with  the  generally  accepted 
principle  that  the  community  ought  to  protect  its  members 
from  starvation : from  which  it  seems  to  follow  that  no  one’s 
income  should  be  reduced  by  taxation  below  what  is  required 

* The  latter  of  these  would  be  the  immediate  practical  danger,  as  it  is  not 
likely  that  such  unequal  taxation  of  the  rich  would  be  introduced  in  most 
civilised  countries  simultaneously. 


566 


POLITICAL  ECONOMY 


BOOK  III 


to  furnish  him  with  the  bare  necessaries  of  life.  For  if  govern- 
ment is  to  risk  a serious  instalment  of  the  evils  of  communism 
in  order  to  secure  all  members  of  the  community  from  starvation, 
it  hardly  ought  to  aggravate  its  inroad  on  the  motives  that 
normally  prompt  the  poor  to  energetic  industry,  by  taking 
from  those  who  remain  independent  a part  of  what  it  would 
actually  have  to  give  them  if  they  sought  its  aid.  And  if  on  this 
ground  Kve  exempt  altogether  from  taxation  incomes  below  a 
certain  low  limit,  it  would  be  obviously  unreasonable  to  exact 
a full  quota  of  payment  fr-om  those  just  above  this  minimum ; 
for  this  would  lead  to  the  absurd  result  that  persons  who  could 
only  earn  a very  little  more  than  the  minimum  would  lose  the 
whole  of  such  extra  eaniings.  I conclude,  therefore,  that  we 
ought  to  treat  as  taxable  only  that  portion  of  any  individual’s 
income  which  is  not  required  to  provide  necessaries  either  for 
himself  or  for  those  dependent  on  him.  Even  apart  from  any 
quesiion  of  poor-relief,  I think  that  taxation  proportional  to 
what,  in  the  widest  sense,  may  be  called  superfluous  consumption 
would  tend  to  equalise  .sacrifices  more  nearly  than  the  rule  of 
projiortioning  taxation  to  total  income;  since  deprivation  of 
th  necessaries  of  life  is  an  evil  so  indefinitely  greater  than 
depiivation  of  luxuries  that  tlie  two  may  be  fairly  treated  as 
incommensurable ; and  we  may  jussume  generally  that  if  poor 
and  rich  alike  are  deprived  of  a certain  proportion  of  their 
resources  available  for  non-necessary  expenditure,  the  loss  thus 
incurred  of  purchasable  satisfaction  will  be  at  least  as  great  to 
the  poorest  class  that  will  be  taxed  at  all,  as  it  will  be  to  any 
other  class.  The  que.stion,  I think,  is  rather  whether  even  this 
principle  is  not  oppressive  to  the  poor  ; and  whether  in  order  to 
equalise  the  real  burden  of  taxation  we  ought  not  to  lay  a 
progressively  increasing  tax  on  the  luxurious  expenditure  of 
the  rich.  I unust  admit  that,  in  my  opinion,  such  a tax 
would  be  justifiable  from  the  point  of  view  of  distribution 
alone ; but  it  is  open  to  the  jiractical  objection  that  the 
progression  if  once  admitted  would  be  very  difficult  to  limit, 
owing  to  the  impossibility  of  establishing  any  definite  quantita- 
tive com])arison  between  the  pecuniary  sacrifices  of  the  rich  and 
those  of  the  poor ; and,  therefore,  there  would  be  a serious 
danger  that  the  progression  would  be  carried  so  far  as  to  check 
accumulation  or  drive  capital  from  the  country,  thus  causing  a 


CHAP.  VIII 


PUBLIC  FINANCE 


567 


loss  to  production  which  would  more  than  outweigh  the  gain  in 
equalisation  of  sacrifice  *. 

If,  however,  we  allow  the  rule  of  equality  in  the  distribution 
of  financial  burdens  to  be  overborne  in  favour  of  the  rich  by  the 
advantage  of  encouraging  the  accumulation  of  capital  in  the 
country,  it  seems  reasonable  to  aim  at  the  same  result  more 
directly  by  a measure  that  will  operate  generally  in  favour  of 
those  who  derive  their  income  mainly  fi-om  labour ; namely,  by 
exempting  savings  fi-om  taxation.  A certain  minimum  of 
savings,  indeed, — enough  to  prevent  individuals  from  becoming 
a burden  to  others  in  age  or  sickness, — should  be  included  in  the 
exemption  of  necessaries  argued  for  in  the  preceding  paragraph. 
Further  than  this  there  would  be  no  ground  for  carrying  the 
exemption,  if  what  were  saved  were  merely  hoarded,  in  the 
form  of  coin  or  durable  consumers’  wealth ; since  the  portion  of 
wealth  that  at  any  given  time  was  so  hoarded  would  at  £he 
time  be  merely  employed  in  gratifying  the  hoarders  by  giving 
them  a sense  of  power  or  security ; and  there  would  be  no 
reason  why  these  personal  gratifications  should  not  bear  along 
with  others  the  reduction  required  to  supply  the  needs  of 
government.  But,  actually,  since  what  is  saved  takes  mainly 
the  form  of  capital  that  aids  industry,  the  saver — whatever  his 
motives  may  be— ^does  in  fact  render  an  important  service  to 
production ; and  it  seems  desirable  that  this  should  at  least  be 
as  little  as  po.ssible  discouraged  by -taxation. 

But  again : if  we  exempt  savings  on  this  gi-ound,  it  seems 
reasonable  to  extend  the  exemption  to  what  is  spent  by  a 
father  of  a family  on  the  education  of  his  children,  so  far  as  it 
tends  to  nuike  them  more  efficient  labourers ; and,  similarly,  to 
encourage  by  a similar  exemption  the  devotion  of  funds  by 
gift  or  bequest  to  public  objects  of  real  utility,  provided  that 
adei  juate  security  is  taken  that  they  are  efficiently  administered ; 
especially  if  the  objects  are  of  a kind  to  which  public  money 
might  reasonalfiy  be  allotted,  if  private  liberality  were  wanting. 
It  may  even  be  fairly  urged,  that  a considerable  part  of  the 
non-necessary  expenditure  of  the  rich  is  actually  incuiTed  in 

* Such  a scale  of  taxation  as  I — after  Mill — have  proposed  in  the  text,  in 
which  the  proportion  of  tax  to  income  is  decreased  at  the  lower  end  but  not 
(materially)  increased  at  the  upper,  is  conveniently  called  a degressive  as 
distinct  from  a progressive  scale. 


568 


POLITICAL  ECONOMY 


BOOK  III 


maintaining  and  transmitting  culture,  and  that  this  also  is  a 
function  of  sufficient  social  importance  to  be  properly  encouraged 
by  exemption  fi’om  taxation ; though  there  is,  of  course,  great 
diflSculty  in  distinguishing  expenditure  of  this  kind  from  that 
which  ministers  to  mere  personal  enjoyment.  I should  propose 
to  recognise  these  various  claims  to  exemption  by  throwing 
a large  .share  of  the  burden  of  taxation  on  the  consumption 
of  commodities  that  are  neither  necessary  nor  promotive  of 
culture.  Such  taxes  on  commodities,  however,  tend  to  be 
seriously  unequal;  especially  since  there  are  very  strong  tech- 
nical reasons  for  concentrating  such  taxation  on  a few  articles 
largely  consumed,  in  order  to  minimise  the  cost — financial  and 
extra-financial — that  it  involves ; and  it  is  almost  ine\itable 
that  the  expenditure  on  these  particular  articles  should  form 
a very  variable  proportion  of  the  total  expenditure  of  different 
classes  of  the  community  on  things  that  are  neither  necessaries 
nor  promotive  of  culture.  So  far  as  the  classes  thus  over- 
burdened can  be  distinguished  as  those  receiving  incomes  of 
certain  amounts,  the  inequality  may  be — and  should  be — roughly 
compensated  by  an  income-tax  on  other  classes,  as  is  done  in  the 
English  budget ; but  there  are  still  liable  to  remain  great 
variations  in  the  consumption  of  taxed  commodities  among 
persons  of  similar  incomes — owing  to  variations  of  taste,  con- 
stitution, &c. — for  which  it  is  practically  impossible  to  make 
compensation.  The  adoption,  therefore,  of  this  method  of 
raising  taxes  must  be  admitted  to  be  incompatible  ■noth  any 
exact  equalisation  of  the  burden  of  taxation.  But  in  fact  any 
such  exactness  is  rendered  practically  unattainable,  on  the 
general  principle  above  adopted,  by  the  vagueness  of  the 
distinction  between  necessaries  and  luxuries,  and  the  gi’eat 
differences  in  the  needs  of  different  persons  and  of  the  same 
person  at  different  times ; and  the  method  of  taxing  commodities 
has  the  merit  of  avoiding  the  worst  inequalities  which  taxation 
proportioned  to  income  would  cause,  in  consequence  of  these 
differences  of  need ; since  it  enables  those  persons  whose  needs 
are  greatest  to  diminish  their  share  of  taxation,  by  abstinence 
from  customary  luxuries.  For  this  latter  reason  chiefly  I think 
it  desirable  that  the  taxation  of  the  poor  should  be  almost 
entirely  thrown  on  commodities  of  the  kind  I have  defined : as 
is  the  case  in  England  with  taxation  for  the  purposes  of  the 
central  government. 


GHAP.  VIII 


PUBLIC  FINANCE 


569 


Generally  speaking,  it  is  expedient  to  select  for  taxation 
commodities  of  which  the  consumption  is  not  likely  to  he 
restricted  to  any  great  extent  through  the  desire  to  avoid 
payment  of  the  tax,  as  all  such  restriction  increases  the  excess 
of  the  loss  to  the  public  caused  by  the  tax,  over  and  above  the 
gain  to  the  treasury ; since  the  persons  who  are  driven  to 
consume  commodities  which  they  do  not  like  so  well  suffer 
a manifest  loss  of  utility.  But  some  restriction  is  inevitable : 
hence  there  is  a strong  reason  for  fixing  taxation  on  commodities 
which  are  liable  to  be  largely  consumed  in  excess  of  what  is 
salutary : since  so  far  as  such  excess  is  prevented  by  the  tax, 
the  restriction  of  consumption  is  positively  beneficial  to  the 
community.  And  though  legislative  interference  with  the  sole 
object  of  limiting  the  consumption  of  dangerous  commodities  is 
emphatically  condemned  by  advocates  of  natural  liberty,  they 
have  not,  for  the  most  part,  pushed  their  antagonism  so  far  as 
to  maintain  that  the  selection  of  taxes  ought  not  to  be  partly 
influenced  by  this  consideration.  On  the  other  hand,  the 
burden  of  such  taxes — as  those  on  alcoholic  liquors  and  tobacco 
— is  liable  to  a special  inequality ; since  many  persons  shun 
these  dangerous  commodities  altogether,  while  among  those 
who  consume  them  the  standai'd  of  strict  moderation  is  vague 
and  variable,  and  there  are  many  degrees  of  excess  possible  h 
It  is  desirable  to  prevent  this  inequality  from  being  very 
maiked : thus,  from  a distributional  point  of  view,  there  is 
a positive  advantage  in  the  re-imposition  of  the  duty  on 
sugar  which  was  abolished  in  1874.  But  imperfect  equalisa- 
tion is  a drawback  inseparable  from  the  special  advantage 
of  taxation  on  non-necessary  commodities,  namely,  that  the 
needy  taxpayer  can  avoid  it : and  what  is  most  important 
socially  and  politically  in  distributing  taxation  is  to  avoid 
marked  over-taxation  or  under-taxation  of  different  grades  of 
income. 

§ 8.  So  far  we  have  implicitly  assumed  that  taxes  on 


' I agree  with  Mr  Dudley  Baxter  {Taxation  of  the  United  Kimjdom,  c.  xxi. ), 
that  in  estimating  the  burden  of  ta.xes  on  alcoholic  liquors  the  extra  contribution 
levied  from  the  drunkard  should  be  regarded  as  a fine  rather  than  a tax  : but  I 
think  fairness  requires  the  definition  of  excess  to  be  an  indulgent  one,  since  there 
are  many  other  branches  of  luxurious  consumption  in  which  the  limit  of  strict 
moderation  is  often  exceeded. 


570 


POLITICAL  ECONOMY 


BOOK  in 


commoditievS  can  be  so  imposed  as  to  fall  entirely  on  those  who 
consume  them ; and  similarly  that  an  income  or  property  tax 
will  be  borne  by  the  persons  on  whose  income  or  property  it  is 
laid.  We  have  now  to  notice  a new  element  of  imperfection 
and  uncertainty  in  the  equalisation  of  taxation,  due  to  the  fact 
that  we  can  only  partially  succeed  in  making  the  burden  either 
of  “ direct”  or  “ indirect”  taxes  fall  where  we  desire  : the  burden 
is  liable  to  be  transferred  to  other  persons  when  it  is  intended 
to  remain  where  it  is  first  imposed ; and,  on  the  other  hand, 
when  it  is  intended  to  be  transfeiTed  the  process  of  transference 
is  liable  to  be  tardy  and  incomplete*.  Indeed  this  process  is 
often  so  complicated  and  obscure  that  it  is  a problem  of  con- 
siderable intricacy  and  difficulty  to  ascertain  where  the  burden 
of  a tax  actually  rests : and  it  is  not  even  a simple  matter 
to  state  accurately  the  general  principle  for  determining  the 
incidence  of  a tax,  supposing  all  the  facts  to  be  known.  Thus 
{e.g.)  Mill  appears  to  assume  as  a general  principle  (Book  v.  c.  iii. 
§ 3)  that  a tax  must  be  “ considered  as  paid  ” by  “ those  who 
“ would  be  benefited  if  it  were  taken  off.”  But  it  is  easy  to 
shew  that,  in  some  cases,  the  whole  benefit  of  remission  would 
be  reaped  by  persons  who  have  not  borne  any  ])art  of  the 
burden  of  the  tax-:  it  is  not  the  extra  income  that  a man  would 
gain  if  the  tax  weie  taken  off  which  gives  the  true  measure  of 
the  buixlen  it  imposes  on  him,  Imt  rather  the  extra  income  that 
he  would  now  be  enjoying  if  it  had  never  been  laid  on.  But 
to  get  even  an  appi’oximate  estimate  of  this  hypothetically 
determined  burden  ma\'  require  a very  careful  consideration  of 
complex  consequences ; and  the  result  must  often  be  at  the 
best  but  partially  satisfactory.  I will  illustrate  by  taking  the 
most  important  cases ; observing  that  whenever  a tax  is  trans- 
ferred— at  once  or  gradually,  in  whole  or  in  part — the  benefit  of 
its  remission  tends  to  be  correspondingly  transferred. 

To  begin  with  the  simplest  case. 

* The  common  classification  of  taxes  as  Direct  and  Indirect  appears  to  me 
liable  to  mislead  the  student,  by  ignoring  the  complexity  aiid  ditlTciilty  of  the 
problem  of  determining  the  incidence  of  taxation. 

- This,  indeed,  seems  to  be  Mill’s  view  in  another  passage  (Book  v.  c.  ii.  § fi) 
in  which  he  affirms  that  “there  is  not  the  smallest  pretence  for  looking  on”  the 
existing  land-tax  in  England  “as  a payment  exacted  from  the  existing  race  of 
“ landlords  ” : though  it  must  be  evident  that  it  is  the  existing  race  of  landlords 
who  would  benefit  by  its  remission. 


CHAP,  vm 


PUBLIC  FINANCE 


571 


I.  A special  tax  on  a class  of  persons,  distinguished  by 
characteristics  either  irremovable  or  of  no  economic  importance, 
tends  to  be  borne  wholly  by  the  persons  who  pay  it.  This  would 
be  the  case  (e.^.)  with  a tax  on  Jews  or  Papists ; for  even  if  some 
of  the  Jews  left  the  country  in  consequence,  or  some  of  the 
Papists  became  Protestants,  the  exchange  value  of  the  services 
of  the  remainder  would  not  thereby  be  materially  increased. 

II.  Taxes  of  the  above  kind  are  opposed  to  modern  senti- 
ments of  equity.  A nearly  similar  inevitability,  however, 
attaches  to  a general  tax  on  incomes,  simply  proportioned  to 
their  amounts,  so  long  as  it  is  not  heavy  enough  to  induce  any 
particular  class  of  the  persons  on  whom  it  is  imposed  to  diminish 
maj;erially  the  relative  sujjply  of  their  labour ; either  vohxntarily, 
through  emigration  or  abstinence  from  matrimony,  or  involun- 
tarily in  consequence  of  the  resources  of  their  families  being 
reduced  below  the  minimum  required  to  support  life.  But  if  any 
considerable  diminution  in  the  relative  numbers  of  any  class 
takes  place  through  these  causes,  it  will  tend  to  raise  the  market 
value  of  their  labour  to  some  extent,  and  to  that  extent  to 
transfer  the  burden  of  the  tax  to  other  membei's  of  the  com- 
munity ; but  obviously  with  very  diffei’ent  degrees  of  rapidity, 
according  as  the  effect  is  produced  (1)  by  emigration,  or  (2)  by 
abstinence  from  matrimony  or  inability  to  rear  children.  Similar 
consequences  may  of  course  follow  from  any  taxation  that  falls 
specially  on  the  poorer  classes  of  labourers ; hence  there  is  an 
element  of  truth  in  the  old  doctrine  that  “ taxes  on  wages 
“tend  to  fall  on  profits,”^  if  applied  to  the  wages  (jf  unskilled 
labour,  supposed  to  be  already  at  the  minimum  required  to 
“ enable  the  labourers,  one  with  another, . t(j  subsist  and  per- 
“ petuate  their  race.”  And  some  effect  of  this  kind  might  no 
doubt  be  produced  even  by  taxes  proportional  (tis  above  proposed) 
to  non-necessary  expenditure : but,  unless  such  taxes  were 
extremely  heavy,  it  would  generally  be  of  so  indefinite  and 
remote  a kind  as  not  to  be  practicall}'  worth  estimating. 

' ThoTigh  ill  fact  the  burden  thus  transferred  would  be  divided  among  (1)  the 
employers  of  the  labour  grown  dearer,  (2)  the  consumers  of  its  ultimate  products, 
(3)  labourers  in  other  grades,  and  (4)  owners  of  capital,  in  proportions  which 
will  vary  very  much  according  to  circumstances ; and  which,  I may  add,  would 
be.  very  difficult  to  ascertain  with  even  approximate  accuracy  in  any  concrete 
case,  owing  to  the  intermingled  effects  of  other  causes. 


572 


POLITICAL  ECONOMY 


BOOK  III 


III.  A tax  levied  annually  on  the  owners  of  any  particular 
kind  of  durable  wealth,  of  which  the  supply  is  absolutely  limited, 
is  in  effect  more  intransferable  than  it  is  intended  to  be ; since 
it  will  remain  onerous  to  the  persons  on  whom  it  was  originally 
imposed  even  after  they  have  sold  the  article  taxed.  For  instance, 
if  Raphael’s  pictures  were  thus  taxed,  the  amount  of  the  tax 
capitalised  would  tend  to  be  subtracted  from  their  price,  so  that, 
after  a single  transfer  by  sale,  the  tax  would  not  be  really 
onerous  to  the  person  who  actually  paid  it.  A similar  effect 
will  be  produced  by  a special^  tax  on  land  of  fixed  amount,  not 
increasing  with  its  value  or  rent:  so  far  as  land  has  changed 
hands  by  sale  since  its  imposition,  the  burden  of  the  tax  will  be 
no  longer  borne  by  the  actual  landowner ; and,  therefore,  even  if 
the  tax  was  oiiginally  unjust,  the  actual  landowner  will  in  such 
case  have  no  claim  to  its  remission.  Hence  where  such  a tax  is 
of  old  date,  so  that  a considerable  amount  of  land  has  changed 
hands  by  sale — and  all  by  inheritance- — since  its  original 
imposition,  it  seems  best  not  to  regard  it  as  really  a tax  at  all, 
but  as  a share  of  the  rent  of  land  reserved  to  the  community ; 
just  as  if  it  had  been  a payment  imposed  when  the  land  was 
allowed  to  pass  into  pi’ivate  ownership. 

IV.  When,  however,  a special  tax  is  imposed  on  land, 
varying  in  proportion  to  its  value,  the  case  is  different,  and 
the  incidence  of  the  tax  more  complicated ; and  it  may  be 
of  some  practical  interest  to  examine  it  in  detail,  on  account 
of  the  special  burdens  laid  on  land  and  houses — which  may  be 
regarded  as  a particular  form  of  utility  added  to  land — in  our 
system  of  local  taxation.  At  any  given  time  there  is  a certain 
amount  of  outlay  of  various  kinds  for  the  purpose  of  increasing 
the  utility  of  land,  which  would,  apart  fi’om  the  tax,  be  re- 
munerative ; but  a portion  of  which  will  be  unprofitable,  if  the 
tax  be  imposed,  unless  the  price  of  the  produce  of  land  rises. 
Hence  the  imposition  of  the  tax  will  tend  to  prevent  this 
j)ortion  of  the  outlay  ft’om  being  made,  and  so  to  restrict 

' The  effect  of  a tax  on  land  which  is  merely  one  form  of  a more  genei-al  tax 
on  property  or  income  will  be  quite  different,  since  in  this  latter  case  the  selling 
price  of  the  land  will  not  tend  to  be  lowered,  as  its  purchaser  will  have  to  pay  no 
more  taxes  in  consequence. 

See  § 11  for  a discussion  of  the  peculiar  economic  characteristics  of  taxes 
on  inheritance. 


CHAP,  vm 


PUBLIC  FINANCE 


573 


the  supply  of  the  utilities  that  it  would  have  produced,  and 
consequently — sooner  or  later — to  raise  their  price  to  an  extent 
varying  according  to  the  conditions  of  supply  and  demand  for 
the  produce  in  question.  If  (e.g.)  the  producers  are  closely 
pressed  by  foreign  competition,  the  rise  may  be  very  slight; 
thus  an  increase  in  local  rates  in  England,  sufficient  to  be 
a serious  discouragement  to  the  improvement  of  agricultural 
land,  woiild  still  have  comparatively  little  effect  in  raising  the 
price  of  corn.  But  to  whatever  extent  the  price  rises  from  this 
cause  b the  burden  of  the  tax  will  ultimately  rest  on  the 
consumer  or  purchaser  of  the  utilities  furnished  by  the  land; 
i.e.,  on  the  occupier  (who  may,  of  course,  be  actually  the  owner) 
of  land  used  for  enjoyment  (parks,  gardens,  ,&c.),  or  on  the 
purchaser  of  the  produce  of  agricultural  land, — who,  however, 
if  he  be  a purchaser  not  for  consumption  but  for  sale  or  pro- 
duction, will,  under  ordinary  conditions,  hand  on  the  whole  or 
part  of  the  burden  still  further,  till  it  reaches  what  we  may 
call  the  ultimate  consumer. 

The  initial  operation,  however,  of  such  a tax  may  be  some- 
what further  complicated  by  its  effects  on  the  business  of 
producing  the  increased  utility  of  the  land.  To  illustrate  this 
complication,  we  may  take  the  specially  important  case  of  land 
used  for  building.  Suppose  that  a new  tax  proportional  to 
value — not  balanced  by  corresponding  taxes  on  other  sources  of 
income — is  laid  on  owners  of  land  generally,  including  owners 
of  land  with  buildings  on  it  (the  value  of  the  buildings  also 
being  reckoned) ; and  suppose  for  simplicity  that  the  tax  is 
annual  and  rent  is  competitively  determined  afresh  from  year 
to  year.  Then,  as  the  imposition  of  the  tax  cannot  at  once 
affect  the  supply  of  houses  or  the  demand  for  them,  the  whole 
tax  will  at  first  tend  to  be  paid  by  the  owner;  so  that  the 
building  of  houses  will  become  less  remunerative,  and  will 
consequently  be  reduced  in  extent  (assuming  that,  apart  from 
the  tax,  building  would  go  on  in  the  locality).  The  resulting 
limitation  of  supply — as  houses  cannot  profitably  be  imported — 
will  tend  to  raise  their  price  and  rent  sufficiently  to  make  build- 
ing remunerative;  that  is,  if  the  cost  of  building  were  unaltered, 
the  rent  would  tend  to  be  increased  by  the  amount  of  the  propor- 

‘ Here  again,  it  will  generally  be  very  difficult  to  ascertain  in  a concrete 
case,  bow  far  any  rise  in  price  has  actually  been  due  to  this  cause. 


574 


POLITICAL  ECONOMY 


BOOK  nr 


tion  of  the  tax  that  falls  on  the  rent  of  the  building  as  distinct 
from  the  ground.  But  in  fact,  if  the  tax  be  a heav}"  one, 
the  rise  will  tend  to  be  temporarily  somewhat  less  than  this ; 
since  the  cost  of  building  will  undergo  some  reduction  in 
consequence  of  the  check  given  to  the  building  industry  by  the 
tax,  which  will  tend  to  diminish  for  a time  the  returns  to  the 
labour  and  capital  employed  in  this  industr}'.  Ultimately, 
however,  the  whole  portion  of  the  tax  that  is  paid  for  the  value 
of  the  house  itself  will  tend  to  fall — in  the  case  of  private 
dwelhng-houses^ — on  the  consumer  or  occupier,  unless  indeed 
the  conditions  of  supjdy  and  demand  are  such  that  no  fresh 
building  is  going  on  in  the  locality.  The  portion,  however, 
that  falls  on  the  ground-rent  will  continue  to  be  bome  by 
the  owner  of  the  ground  (supposing,  as  above  explained,  that 
it  has  not  changed  hands)  unless  the  tax  has  caused  a rise  in 
agricultural  produce  and  the  land  is  so  situated  that  it  could 
be  as  remuneratively  employed  for  agricultural  pui’poses  as  for 
building.  Nay  further,  if  the  tax  be  not  uniform  but  higher  in 
some  districts  than  in  others  equally  convenient  to  the  possible 
occupiers,  the  whole  excess — and  not  merely  the  proportion  of 
the  excess  that  falls  on  the  ground-rent — will  tend  to  remain  on 
the  owner ; at  least  so  long  as  the  fall  does  not  render  the  land 
more  pi’ofitable  for  other  purposes  than  it  is  for  building. 

So  far  I have  supposed  the  tax  to  be  formally  paid  In'  the 
owner.  If,  however,  it  be  laid  in  the  first  instance  on  the 
occupier,  the  effect  will  be  substantially  the  same  as  soon  as  the 
rent  comes  to  be  determined  afresh,  after  the  imposition  of  the 
tax. 

I 9.  Y.  In  short,  a tax  on  land  and  buildings  pi’oportional 
to  their  value  has  partly  the  effect  of  a tax  on  the  product  of 
certain  industries : partly,  again,  so  far  as  the  land  or  biiildings 
taxed  are  “ producers’  wealth,”  it  has  the  effect  of  a tax  on  the 
instruments  of  certain  industries.  To  whatever  extent  it 
operates  in  either  way,  it  comes  witliin  the  large  class  of  what 
we  may  call  taxes  on  production;  which  occupies  the  most 

* So  far  as  the  tax  falls  on  buildings  used  as  producers’  capital,  it  will  have 
a certain  tendency  to  be  transferred  through  industrial  competition  to  the  con- 
sumers of  the  finished  produce  : but  the  incidence  of  the  tax  will  be  so  general 
that  the  extent  and  manner  of  its  possible  transfer  is  very  difficult  to  determine — 
especially  since  producers  who  use  land  will  be  more  heavilj’  taxed. 


CHAP.  VIII 


PUBLIC  FINANCE 


.575 


important  place  in  modern  systems  of  taxation.  This  class 
includes,  besides  (1)  the  important  taxes  before  referred  to  on 
the  manufacture  and  sale  of  material  products,  also  (2)  taxes 
on  conveyance,  (3)  payments  (fees,  licenses,  &c.)  for  leave  to 
practise  certain  trades  and  professions,  and  (4)  a great  part  of 
the  taxes  (by  means  of  stamps)  on  the  transfer  of  property — 
so  far  as  these,  falling  with  more  weight  on  traders,  may 
be  regarded  as  largely  taxes  on  trade.  Such  taxes  on  special 
lucrative  callings  are  generally  intended  to  fall,  not  on  the  persons 
who  exercise  them,  but  on  the  ultimate  consumers  of  the 
commodities  that  the  former  furnish  or  assist  in  furnishing ; 
and  it  is  obvious  that  industrial  competition  will  tend  to  cause 
this  transfer  of  the  burden,  so  far  as  it  tends  to  equalise  remu- 
nerations. Still  the  transfer  ought  not  to  be  assumed,  in 
estimating  the  incidence  of  taxes,  without  important  qualifica- 
tions. We  may  indeed  take  it  as  broadly  true,  in  mo.st  cases, 
that  the  burden  of  a long-establisfied  tax  on  production  does  not 
rest  on  the  class  of  persons  who  actually  pay  it ; though  even 
here  it  must  be  borne  in  mind  that,  owing  to  the  limited  know- 
ledge that  producers  have  of  each  other’s  remunerations, 
industrial  competition,  however  open  and  active,  cannot  tend 
to  bring  about  any  exact  equalisation  of  earnings ; it  can  but 
operate  roughly  to  prevent  large  and  palpable  differences. 
But  it  is  only  under  special  circumstances  that  a new  tax  on 
production  can  be  completely  and  at  once  transferred  to  the 
consumer.  For,  firstly,  whenever  the  rise  in  price  required  to 
effect  the  transfer  involves  a mateiial  reduction  in  the  sale  of 
the  commodity  taxed,  some  initial  loss  to  producers  must  result ; 
which  will  be  greater,  ceteris  paribus,  in  proportion  to  the 
extent  of  the  reduction.  We  have  thus  an  additional  reason  for 
selecting,  in  the  imposition  of  fresh  taxes,  commodities  for  which 
substitutes  cannot  easily  be  found  and  with  which  consumers 
will  not  willingly  dispense,  in  order  that  the  incidental  loss  to 
producers  may  be  as  small  as  jiossible.  Again,  the  extent  of 
loss  to  ])roducers  caused  by  a reduction  in  the  demand  for  their 
commodities  varies  very  much  according  to  the  degree  of 
mobility  of  their  capital ; thus  it  is  usually  less  for  traders 
than  for  manufacturers  and  agricidturists ; which  is  a reason, 
from  a strictly  national  point  of  view,  for  taxing  imports,  ceteris 
paribus,  rather  than  the  products  of  native  industry. 


576 


POLITICAL  ECONOMY 


BOOK  nr 


But  again  : the  tendency  of  industrial  competition  to  transfer 
the  burden  of  taxation  from  producers  to  consumers  will  not 
operate  where  the  former  are  enjoying  extra  profits  to  an  amount 
exceeding  that  of  the  tax ; whether  through  monopoly,  natural  or 
artificial,  or  through  the  possession  of  scarce  natural  resources  or 
social  opportunities.  Thus  a moderate  tax  on  the  produce  of 
famous  vineyards  would  have  no  tendency  to  be  transfeired  to 
the  consumer ; the  owners  of  the  vineyards  would  still  produce 
as  much  as  they  can  and  get  the  market-price  for  it,  as  they  do 
now,  so  that  the  whole  of  the  tax  would  be  substantially  paid 
out  of  their  incomes.  Where,  however,  a monopoly  has  been 
constituted  by  means  of  a grant  of  special  rights  and  privileges 
granted  by  government,  an  exceptional  payment  by  its  o^NTiers 
should  not  be  regarded  as,  in  substance,  strictly  a tax ; it  is 
rather  a share  in  the  extra  profits  of  the  monopoly  reserved  to 
the  community. 

It  is  to  be  noted  further,  that  in  the  case  of  temporary 
and  partial  monopolies,  protected  only  by  the  difficulties  of 
profitable  competition,  it  must  often  be  very  uncertain  where 
the  burden  of  a tax  on  the  monopolised  production  really  rests, 
after  a certain  interval  from  its  original  imposition.  For  the 
tax  tends  to  operate  as  an  additional  obstacle  to  competition ; 
but  the  force  it  exercises  in  this  direction  can  hardly  ever  be 
known  for  certain.  Thus  the  burden  of  a tax  imposed  on  the 
receipts  of  a railway  company,  if  it  were  practically  free  from 
the  restraint  of  actual  oi-  prospective  competition,  would  fall  on 
the  shareholders : for  if  it  were  profitable  for  them  to  raise  then- 
fares  after  the  tax  had  been  imposed,  it  would  have  been  equally 
profitable  for  them  to  do  this  independently  of  the  tax.  But  so 
far  as  the  tax  tends  to  remove  the  fear  of  competition,  it  gives  a 
power  of  raising  fares  which  pro  tanto  compensates  for  its  burden. 

Finally,  we  must  observe  that  taxes  on  commodities  when 
laid  in  certain  ways  may  actually  benefit  certain  classes  of  the 
producers  or  sellers  of  such  commodities,  by  gi^dng  them  advan- 
tages in  the  competition  with  other  producers.  Thus  a tax  on 
the  materials  of  production  or  on  products  in  an  early  stage  of 
manufacture,  or  on  articles  of  trade  some  time  before  they  are 
sold,  has  a certain  tendency  to  increase  the  advantage  of  large 
capitalists,  as  it  causes  more  capital  to  be  i-equfred  for  a given 
amount  of  business.  Hence  the  consumer  may  lose  by  such  a 


CHAP.  VIII 


, PUBLIC  FINANCE 


577 


tax,  through  a rise  in  price,  considerably  more  than  is  gained 
by  the  exchequer;  the  employer  being  able  to  obtain  ample 
wages  of  management,  as  well  as  interest,  for  the  extra  capital 
employed.  Licenses  again,  so  far  as  the  charge  for  them  is 
fixed  independently  of  the  amount  of  business,  are  similarly 
advantageous  to  large  employers. 

§ 10.  Further,  in  a complete  estimate  of  the  incidence  of 
a tax,  we  ought  strictly  to  take  into  account  not  merely  the 
burden  laid  on  producers  or  consumers  of  the  article  taxed,  but 
also  the  loss  to  the  community  through  the  non-production 
and  non-consumption  of  the  greater  quantity  and  better  quality 
of  commodities  which  would  have  been  produced  if  the  tax 
had  not  been  imposed.  That  is,  we  have  to  take  into  account 
those  effects  on  production  which  we  began  by  distinguishing 
from  effects  (merely)  on  distribution ; so  far  as  the  former  being 
unequally  distributed,  really  affect  distribution  as  well.  Let  us 
now  notice  briefly  the  chief  cases  of  the  productional  effects. 

Let  us  take  first  the  case  of  taxes  on  the  manufacture 
and  sale  of  commodities.  Such  taxes  cause  an  economic  loss, 
uncompensated  by  any  gain  to  the  treasury,  so  far  as  the 
processes  of  production  are  impaired  or  hampered,  or  improve- 
ments in  them  precluded,  by  the  necessity  of  conforming  to 
rules  imposed  to  guard  against  evasion  or  otherwise  for  the 
convenience  of  the  taxgatherer.  For  instance,  the  production 
of  oil  in  Asia  Minor  is  said  to  be  seriously  deteriorated  by  the 
fact  that  the  olives  after  harvest  have  to  be  kept  untouched 
until  the  tax-collector  has  found  time  to  come  and  ascertain 
their  amount.  A further  uncompensated  loss  results  so  far  as 
such  taxes  admit  of  being  evaded  by  the  adoption  of  a less 
economical  mode  of  producing  the  commodity ; or  by  the 
production  of  substitutes  for  the  taxed  product,  satisfying  the 
same  wants  by  inferior  means.  Some  effect  of  this  latter 
kind  is  almost  unavoidable  so  far  as  the  demand  for  the  taxed 
product  is  decreased  by  its  rise  in  price. 

So  far,  again,  as  taxation  of  this  kind  reduces  the  normal 
use  of  materials  or  instruments  of  production,  or  articles  whose 
consumption  conduces  to  the  efficiency  of  productive  labourers, 
for  which  only  imperfect  substitutes  can  be  found  elsewhere, 
a loss  results  to  production  which  may  go  on  increasing  at 
compound  interest, 
s.  P.  E. 


37 


578 


POLITICAL  ECONOMY 


BOOK  iir 


Similarly,  taxes  on  conveyance,  so  far  as  they  hinder  the 
transfer  of  commodities,  tend  to  prevent  such  improvements 
in  production  as  result  from  the  specialisation  of  the  labour 
of  different  places ; and  also,  so  far  as  they  hinder  the 
transfer  of  labour,  they  tend  to  prevent  its  most  efficient 
employment.  So  again,  the  stamp  duties  on  bills  of  exchange, 
receipts,  drafts,  &c.,  have  a tendency  to  hamper  the  development 
of  trade ; though  this  effect  seems  inconsiderable,  so  long  as 
such  duties  are  trifling  in  proportion  to  the  amount  of  the 
transactions  on  which  they  are  imposed. 

We  have  further  to  notice  that  direct  taxes  on  expenditure, 
such  as  taxes  on  carriages,  horses,  plate,  so  far  as  they  reduce 
the  consumption  of  these  commodities,  affect  their  production 
ultimately — though  not  altogether  at  the  first  imposition — 
to  the  same  extent  as  corresponding  taxes  on  the  production 
of  these  articles  ^ 

On  the  other  hand,  there  are  certain  taxes  on  commodities 
that  bring  in  more  to  the  national  treasury  than  the  members 
of  the  nation  lose  as  individuals.  Thus  we  have  seen  that  the 
imposition  of  import  duties  is,  under  certain  special  conditions, 
an  effective  method  of  increasing  a nation’s  income  at  the 
expense  of  foreigners — though  on  various  grounds  a dangerous 
method : and  the  same  is  true  of  export  duties,  whenever  a 
country  has  a monopoly  of  any  product  keenly  demanded. 
Again,  a tax  imposed  on  things  that  are  partly  esteemed  as 
signs  of  wealth,  and  therefore  of  social  status,  pro  tanto  increases 
their  utility  in  proportion  as  it  increases  their  exchange  value ; 
so  that  the  consumers  do  not  lose  what  the  government  gains. 
And  obviously  taxes  that  reduce  the  consumption  of  commodi- 
ties liable  to  be  abused,  such  as  alcoholic  stimulants,  tend  to 
benefit  consumers  thus  prevented  from  injuring  themselves,  and 
indirectly  to  increase  production  by  diminishing  the  loss  of 
efficiency  caused  by  such  production. 

An  income-tax  is  free  from  the — generally  disadvantageous — 
effects  on  production  of  the  taxes  that  we  have  been  considering^ 


' Hence  a certain  share  of  the  burden  of  these  taxes,  at  least  when  newlv 
imposed,  will  in  most  circumstances  be  home  by  persons  engaged  in  the 
production  of  the  commodities  taxed:  no  less  than  in  the  case  of  the  “indirect” 
taxes,  discussed  in  the  preceding  section. 

- The  peculiar  drawbacks  of  an  income-tax,  arising  from  the  difficulty  of 


CHAP.  VIII 


PUBLIC  FINANCE 


579 


Blit  it  is  to  be  observed  that  even  an  income-tax — as  well 
as  any  other  tax  that  diminishes  the  available  resources  of 
individuals — is  liable  to  affect  production  generally,  so  far  as 
it  reduces  the  amount  saved  and  converted  into  capital.  And 
this  effect  cannot  be  altogether  prevented — though  it  certainly 
tends  to  be  reduced — by  proportioning  taxation  (as  before  pro- 
posed) to  superfluous  consumption  rather  than  to  income ; since 
the  taxpayer  may  still  prefer  to  let  the  reduction  fall  on  his 
saving  rather  than  his  consumption.  On  the  other  hand,  when 
the  proceeds  of  a tax  taken  mainly  from  what  would  have  been 
luxuriously  consumed  by  individuals  are  productively  employed, 
by  government,  it  may  be  regarded  as  a mode  of  compulsory 
saving,  by  which  the  capital  of  the  community — though  not  of 
individuals — may  be  materially  increased. 

It  may  be  noticed  further  that,  so  far  as  saving  is  an  affair 
of  habit,  a tax  may  actually  cause,  a diminution  in  capital 
merely  by  the  nature  and  circumstances  of  its  incidence. 
Thus  it  has  been  plausibly  maintained  that  the  taxes  on  in- 
heritance of  property  have  a special  tendency  to  produce  this 
effect;  because  the  person  inheriting  ordinarily  considers  the 
additional  wealth  thus  acquired  as  an  increase  of  capital,  and 
does  not  spend  any  portion  of  it,  but  only  increases  his  expendi- 
ture by  the  annual  interest  on  it. 

§ 11.  This  feads  us  to  the  more  general  question  of  the 
incidence  of  taxes  on  the  acquisition  of  property  by  bequest  or 
intestate  inheritance ; which  I have  reserved  for  separate  con- 
sideration, because  of  the  important  peculiarities  that  they 
present,  when  we  are  considering  the  theoretical  construction  of 
a system  of  taxation.  According  to  the  criterion  above  laid 
down,  it  is  plain  that  the  pecuniary  loss  caused  by  any  such 
tax  falls  on  the  person  who  inherits,  since  he  would  have  been 
richer  by  the  exact  amount  of  the  tax,  if  that  had  not  been  im- 
posed ; except  so  far  as  it  is  probable  that  the  person  from 
whom  he  inherits,  being  aware  of  the  tax,  may  have  left  him  a 
larger  property  in  consequence — a probability  which,  I imagine, 
is  not  practically  important  in  the  case  of  most  of  the  property 
obtained  by  inheritance. 

Nevertheless,  the  considerations  that  ordinarily  would  lead 

obtaining  an  accurate  estimate  of  the  incomes  of  individuals,  belong  to  a more 
technical  discussion  of  the  problem  of  taxation  than  I have  here  attempted. 

37—2 


680 


POLITICAL  ECONOMY 


BOOK  III 


US  to  limit  carefully  the  burden  of  taxation  falling  on  any 
individual  or  class  do  not,  I conceive,  apply  in  the  case  of 
persons  taxed  as  inheritors.  For  government,  by  taking  a 
portion  of  what  would  otherwise  have  come  to  a man  by  in- 
heritance, in  no  way  diminishes  the  motives  that  prompt  him 
to  produce  and  accumulate  wealth — if  anything,  it  tends  to 
increase  these  motives;  nor  does  it  necessarily  cause  even  any 
disappointment  of  expectations,  except  when  the  tax  is  first 
imposed.  On  the  other  hand,  we  ought  undoubtedly  to  take 
into  account  the  diminution  in  inducements  to  industry  and 
care  which  a heavy  tax  on  inheritances  may  cause,  in  the 
view  of  persons  who  look  forward  to  leaving  them.  This 
bad  effect,  however,  of  such  taxes  is  not  likely  to  be  at  all 
equal  in  proportion  to  the  similar  effect  that  would  be  pro- 
duced by  extra  taxes  on  income ; in  fact  the  limits  of  taxation 
on  inheritances  will  be  practically  determined  for  the  financier 
rather  by  the  danger  of  evasion  through  donationes  inter  vivos, 
than  by  the  danger  of  checking  industry  and  thrift : and  either 
danger  will  generally  be  much  less  where  there  are  no  children 
or  other  direct  descendants  to  inherit.  Hence  it  seems  ex- 
pedient, in  the  case  of  these  taxes,  to  give  up  the  ordinary  aim 
at  equality  of  incidence  so  far  as  to  place  a much  heavier  tax 
on  wealth  inherited  by  pereons  not  in  the  direct  line  of  descent 
from  the  previous  owners.  But  if  this  course  be  adopted,  it 
becomes  theoretically  almost  impossible  to  include  these  taxes 
in  an  adjustment  of  genei’al  taxation  on  the  principles  of  dis- 
tribution before  proposed : and  it  seems  to  me  not  only  con- 
venient but  equitable  to  treat  these  taxes  as  a special  burden 
on  the  class  of  persons  owning  capital  in  considerable  amounts — 
inheritances  below  a certain  value  being  exempted'.  For,  as 
was  before  said,  the  proportionment  of  taxation  to  non-necessary^ 
expenditure  seems  certainty  to  make  the  burden  of  sacrifice 
imposed  on  the  poor  heavier  than  that  of  the  rich,  though  the 
excess  does  not  admit  of  being  definitely  estimated ; and  it 
seems  equitable  to  balance  this  excess  roughly  by  the  special 
burden  that  taxes  on  inheritance  will  lay"  on  the  rich. 

' This  exemption  is  expedient  on  other  grounds  besides  that  which  I proceed 
to  urge ; namely,  in  order  to  encourage  thrift  among  the  poor,  and  on  account  of 
the  greater  proportional  cost  of  collecting  the  tax  on  small  inheritances. 


CHAPTER  IX. 


POLITICAL  ECONOMY  AND  PRIVATE  MORALITY. 

§ 1.  We  had  occasion  to  notice  in  the  last  chapter  but 
that  in  considering  some  important  departments  of  govemm  ,1 
interference  it  is  practically  necessary  to  take  account  oi  the 
unconstrained  action  of  private  persons  for  public  objects.  We 
cannot  determine  what  government  ought  to  do  without  con- 
sidering what  private  persons  may  be  expected  to  do ; and  what 
they  may  be  expected  to  do  will,  to  some  extent  at  least, 
depend  on  what  it  is  thought  to  be  their  duty  to  do.  And, 
more  generally,  it  was  before  observed  that  in  the  performance 
even  of  the  ordinary  industrial  functions  with  which  economic 
science  is  primarily  concerned  men  are  not  influenced  merely  by 
the  motive  of  self-interest,  as  economists  have  sometimes  assumed, 
but  also  extensively  by  moral  considerations.  Hence  it  would 
seem  that  an  Ai’t  of  Political  Economy  is  incomplete  without 
some  consideration  of  the  principles  that  ought  to  govern  private 
conduct  in  economic  matters.  But  for  a complete  treatment  of 
this  subject,  it  would  seem  needful  to  begin  by  establishing 
systematically  certain  principles  of  morality,  and  then  consider- 
ing the  relation  of  these  to  the  principles  of  political  economy 
as  expounded  in  the  present  treatise, — a procedure  which  would 
inevitably  introduce  the  fundamental  and  unsettled  controversies 
of  ethics  to  an  extent  that  would  be  hardly  suitable  in  the 
concluding  chapter  of  a work  on  political  economy.  I propose, 
therefore,  in  this  concluding  chapter  to  confine  myself  to  a brief 
reflective  survey  of  the  manner  in  which  the  morality  of  common 
sense  has  actually  been  modified  by  economic  considerations,  only 
trying  here  and  there  to  introduce  somewhat  more  clearness  and 
precision  than  appears  to  be  found  in  ordinary  thought. 


582 


POLITICAL  ECONOMY 


BOOK  iir 


It  is  generally  recognised  that  the  cuiTent  economic  doc- 
trines, and  the  prevalent  habits  of  thought  connected  with 
them,  have  had  an  important  effect  in  modifying  that  part  of 
current  morality  which  is  concerned  with  the  getting  and  dis- 
posing of  wealth — otherwise  than  by  merely  enlightening  and 
rationalising  the  pursuit  of  private  pecuniar^'  interest;  which, 
indeed,  English  Political  Economy  has  for  the  most  part  rather 
assumed  to  be  enlightened  than  sought  to  impi’ove  by  in- 
struction. The  department  of  duty  in  which  this  influence  has 
been  chiefly  noticed  is  that  of  liberality  or  charity.  By  many 
persons  “ hardhearted  political  economy  ” has  been  vaguely 
believed  to  dry  up  the  sources  of  almsgiving;  and  it  is  un- 
doubtedly true  that  almsgiving  under  certain  conditions  is 
shewn  to  be  opposed  to  the  true  interests  of  the  community  by 
economic  arguments  fundamentally  similar  to  a portion  of  those 
on  which  the  inexpediency  of  legally  enforced  communism  is 
usually  rested.  But  we  have  also  had  occasion  to  observe  that 
economic  considerations  have  had  an  important  share  in  defining 
the  current  conceptions  of  the  more  stringent  duties  of  justice 
and.  equity;  and  it  will  be  in  accordance  -with  the  received 
order  of  ethical  discussion  to  begin  by  considering  these  more 
comprehensively  than  we  have  yet  done. 

To  begin  with  an  uncontroversial  definition  of  Justice : we 
may  perhaps' say  that  “just”  claims  to  wealth  or  ser^uces  are 
claims  precise  in  their  natui’e,  for  the  non-fulfilment  of  which  a 
man  is  liable  to  strong  censure,  if  not  to  legal  interference ; in- 
deed we  should  agree  that  such  claims  ought  to  be  capable  of 
legal  enforcement,  if  the  benefits  of  this  were  not  in  some  cases 
outweighed  by  the  incidental  difficulties  and  drawbacks  of 
judicial  investigation  and  governmental  coercion, — as  is  ie.g.) 
largely  the  case  with  the  mutual  claims  of  members  of  a family. 
So  far  as  we  distinguish  from  strictly  just  claims  those  that  we 
should  rather  call  “firir”  or  “equitable,”  the  latter  would  seem 
to  be  less  definite,  but  yet  claims  for  the  fulfilment  of  which 
gratitude  is  not  to  be  expected,  while  their  non-fulfilment  is 
blamed. 

Both  kinds  of  claims  without  distinction  may  be  conveniently 
classified  according  to  their  sources  as  follows : besides  (1)  claims 
determined  by  law  independently  of  contract,  with  which  we 
need  not  here  concern  ourselves,  the  most  important  class  is 


CHAP.  IX  ECONOMICS  AND  PKIVATE  MORALITY 


583 


(2)  that  of  claims  arising  out  of  contract,  express  or  tacit — the 
notion  of  “tacit  contract”  being  extended  to  cover  all  normal 
expectations  which  a man  knows  (or  ought  to  know)  will  be 
produced  by  his  conduct  in  the  minds  of  others.  Such  ex- 
pectations are  of  course  largely  determined  by  custom : while  in 

(3)  a certain  class  of  cases  custom  practically  restricts  freedom 
of  contract — as  in  the  case  of  fees  to  a physician.  Further,  there 
are  (4)  claims  arising  out  of  previous  services  rendered  in 
circumstances  in  which  contract  would  have  been  impossible 
or  inexpedient,  such  as  the  claims  of  parents  on  children ; and 
(5)  claims  to  reparation  for  harm  inflicted;  along  with  which 
we  may  class  claims  to  the  prevention  of  harm,  where  A has 
done  an  act  which  would  injure  B if  no  provision  were  made 
against  its  harmful  consequences.  .Under  this  last  head  would 
come  the  claims  of  children  on  parents  for  sustenance  and 
nurture  during  infancy. 

The  influence  of  Political  Economy  is,  I conceive,  chiefly 
noticeable  as  regards  the  second  and  third  of  these  classes.  In 
the  first  place,  the  “ orthodox  ” ideal  of  free  exchange  is  neces- 
sarily antagonistic  to  the  sway  of  custom  as  such — except  so  far 
as  a customary  determination  of  the  price  of  services,  modifiable 
from  time  to  time  by  changes  in  supply  and  demand,  is  eco- 
nomically advantageous  by  saving  time  and  trouble.  But,  as 
I have  already  observed,  in  a modern  industrial  • community 
custom  can  hardly  be  regarded  as  an  effective  economic  force, 
except  so  far  as  it  blends  with  tacit  combination — or,  I should 
perhaps  say,  tends  to  turn  into  combination  when  resisted. 
If  A pays  B for  certain  services  a customary  price  which  he 
believes  to  be  above  the  competition  price,  it  is  generally  under 
the  condition  of  both  being  aware  that  the  majority  of  B’s 
fellow-labourers  would,  if  necessary,  combine  with  him  in  re- 
fusing to  accept  a lower  price.  How  far  political  economy, 
considered  as  a doctrine  of  what  ought  to  be,  approves  of  com- 
binations to  raise  prices,  when  prompted  by  self-interest;  I will 
presently  consider:  meanwhile  there  seems  no  doubt  that  the 
influence  of  economic  discussion  has  tended  to  invalidate  all 
quasi-moral  obligations  founded  on  customs  pure  and  simple, 
substituting  for  customary  terms  of  exchange  conditions  deter- 
mined by  definite  agreements  freely  entered  into. 

The  duty  of  observing  such  engagements  was  so  clearly 


584 


POLITICAL  ECONOMY 


BOOK  III 


recognised  in  pre-economic  morality  that  it  can  hardly  be  said 
to  have  been  made  any  clearer  through  the  teachings  of  econo- 
mists, though  no  doubt  these  have  dwelt  with  strong  emphasis 
on  the  fundamental  importance  of  this  department  of  morality 
in  a modem  industrial  community.  It  is  rather  in  the  de- 
termination of  certain  doubtful  points  that  arise  when  we  try  to 
define  exactly  the  conditions  under  which  an  agreement  is  to 
be  regarded  as  really  embodying  the  free  choice  of  both  con- 
tracting parties,  that  the  influence  of  political  economy  appears 
to  be  traceable.  It  is  admitted  that,  generally  speaking,  any 
“ really  free  ” exchange  of  commodities  which  the  exchangers, 
have  a right  to  dispose  of  is  legitimate  and  should  be  held 
valid,  and  that  “real  freedom”  excludes  (1)  fi^ud  and  (2)  undue 
influence : but  how  are  we  to  define  these  latter  terms  ? Is  A 
justified  in  taking  any  advantage  that  the  law  allows  him 
(1)  of  the  ignorance  and  (2)  of  the  distress  of  B — supposing 
that  A is  not  himself  the  cause  either  of  the  ignorance  or  of  the 
distress  ? If  not,  to  what  extent  is  he  justified  in  taking  such 
advantage  ? In  the  answers  that  thoughtful  persons  would 
give  to  these  questions  we  may,  I think,  trace  the  influence 
of  economic  considerations,  limiting  the  play  of  the  natural 
or  moral  sentiments  of  sincerity  and  sympathy. 

To  begin  with  the  case  of  ignorance : we  should  not  blame 
A for  having,  in  a negotiation  with  a stranger*  B,  taken  ad- 
vantage of  B’s  ignorance  of  facts  known  to  himself,  provided 
that  A’s  superior  knowledge  had  been  obtained  by  a legitimate 
use  of  diligence  and  foresight,  which  B might  have  used  with 
equal  success.  We  should  praise  A for  magnanimity  if  he  for- 
bore such  advantage : but  we  should  not  blame  him  for  taking 
it,  even  if  the  bargain  that  B was  thus  led  to  make  were  posi- 
tively injurious  to  the  latter,  supposing  that  the  injury  would 
otherwise  have  fallen  on  A,  so  that  there  is  only  a transfer  and 
not  an  increase  of  damage.  For  instance,  we  should  not  blame 
a man  for  selling  in  open  market  the  shares  of  a bank  that  he 
believed  was  going  to  break,  if  his  belief  was  founded,  not  on 
information  privately  obtained  from  one  of  the  partners,  but  on 
his  own  observations  of  the  bank’s  public  acts  or  on  the  judg- 
ment of  other  experienced  outsiders.  Again,  if  a man  has 

’ I say  “a  stranger,”  because  even  a slight  degree  of  friendship  between  the 
parties  would  render  such  a bargain  a betrayal  of  implied  confidence. 


CHAP.  IX 


ECONOMICS  AND  PRIVATE  MORALITY 


585 


discovered  by  a legitimate  use  of  geological  knowledge  and  skill, 
that  there  is  probably  a valuable  mine  on  a piece  of  land  owned 
by  a stranger,  reasonable  persons  would  not  blame  him  for 
keeping  the  discovery  secret  until  he  had  bought  the  land  at 
its  market  value.  And  what  prevents  us  from  censuring  in  this 
and  similar  cases  is,  I conceive,  a more  or  less  conscious  appre- 
hension of  the  indefinite  loss  to  the  wealth  of  the  community 
that  is  likely  to  result  from  any  effective  social  restrictions  on 
the  free  pursuit  and  exercise  of  knowledge  of  this  kind.  Such 
use  of  special  and  concealed  knowledge  is  only  censured  by 
thoughtful  men,  either  (1)  when  it  is  for  some  particular  reason 
against  the  public  interest,  as  (e.g.)  if  members  of  a cabinet 
were  to  turn  their  foresight  of  political  events  to  account  on  the 
Stock  Exchange ; or  (2)  when  the  person  using  it  has  obtained 
it  in  some  way  having  a taint  of  illegitimacy,  as  by  betrayal 
of  confidence,  intrusion  into  privacy,  &c. ; or  (3)  when  the 
person  of  whom  advantage  is  taken  is  thought  to  have  some 
claim  on  the  other  bejmnd  that  of  an  ordinary  stranger. 

§ 2.  Let  us  now  consider  the  question  that  arises  when  we 
try  to  define  the  moral  coercion  or  undue  pressure  that  renders  a 
contract  unfair : namely,  how  far  A may  legitimately  take  advan- 
tage of  the  urgent  need  of  B to  raise  the  price  of  a commodity 
sold  to  the  latter,  supposing  that  he  is  in  no  way  responsible  for 
this  urgent  need.  The  question  is  one,  I think,  of  considerable 
practical  perplexity  to  ordinary  minds ; and  it  requires  some 
care  in  distinction  and  analysis  of  cases  to  give  even  a tolerably 
satisfactory  answer  to  it.  In  the  first  place,  where  B is  under 
the  pressure  of  exceptional  and  sudden  emergency,  in  which  A 
has  a special  opportunity  of  rendering  assistance,  while  the  need 
is  so  urgent  that  there  is  no  room  for  competition  to  operate,  it 
seems  certain  that  A would  be  generally  blamed  for  exacting 
for  his  service  the  full  price  which  it  is  B’s  interest  to  pay : and 
this  would  not  only  be  true  in  cases  of  danger  to  life  or  health, 
where  humanity  seems  more  obviously  to  dictate  unbargained 
assistance,  but  even  where  it  is  a mere  question  of  saving  pro- 
perty. For  instance,  we  should  consider  it  extortionate  in  a 
boatman,  who  happened  to  be  the  only  man  able  to  save  valu- 
able works  of  art  from  being  lost  in  a river,  to  demand  for  his 
services  a reward  manifestly  beyond  their  normal  price ; that  is, 
beyond  the  price  which,  in  ordinary  circumstances,  competition 


586 


POLITICAL  ECONOMY 


BOOK  in 


would  determine  at  that  time  and  place.  Still,  it  is  by  no 
means  clear  that  such  extortion  is  “contrary  to  the  principles 
“ of  political  economy  ” as  ordinarily  understood.  Economists 
assume  in  their  scientific  discussions — frequently  -with  more 
or  less  implied  approval  of  the  conduct  assumed — that  every' 
enlightened  person  will  try  to  sell  his  commodity  in  the  dearest 
market ; and  the  dearest  market  is,  ceteris  parihus,  wherever 
the  need  for  such  commodity  is  greatest.  If,  therefore,  the 
need  of  a single  individual  is  specially  gi’eat,  why  should  not 
the  price  demanded  from  him  rise  proportionally  ? It  ap- 
pears to  me  that  it  is  just  at  this  point  that  there  is  a 
palpable  divergence  between  the  mere  abstract  exposition  of 
the  results  of  natural  liberty'  which  deductive  economic  science 
professes  to  give,  and  the  general  justification  of  natural  liberty' 
which  political  economy  is  traditionally  held  to  include,  and 
upon  which  its  practical  influence  largely  depends.  Enlightened 
self-interest,  in  the  circumstances  supposed,  wdll  prompt  a 
man  to  ask  as  much  trs  he  can  get : but  in  the  argument  that 
shews  the  play  of  self-interests  to  lead  to  just  and  expedient 
results  it  is  assumed  that  open  competition  mil  prevent  any 
individual  from  raising  his  price  materially  above  what  is  re- 
quired for  a due  reduction  of  the  demand.  The  price  <is  thus 
determined  competitively  in  an  ideal  market  presents  itself  as 
the  fair  and — generally  speaking — morally  right  price,  beciiuse  it 
is  obviously  an  economic  gain  that  the  supply  of  any  commodity 
should  be  transfeiTed  to  the  persons  who  value  it  most  and  primd 
facie  just  that  all  suppliers  of  similar  commodities  should  be 
paid  the  same.  In  exacting  ;\s  much  as  this,  the  self-interest  of 
the  seller  seems  to  be  working  iis  a necessary'  factor  in  the  realisa- 
tion of  the  economic  harmony  of  society ; but  any'  further  exac- 
tion which  an  accidental  absence  of  competition  may'  render 
possible  shews  egoism  anarchical  and  discordant  and,  therefore, 
no  longer  under  the  aegis  of  economic  morality'.  Such  exaction 
could  only  avoid  moral  disapprobation  if  the  exceptional  freedom 
from  competition,  of  which  the  seller  takes  advantage,  were  due 
to  foresight  on  his  part  which  it  is  for  the  general  interest  to 
encourage : but  this  case,  I imagine,  is  rare. 

The  conclusion,  on  the  whole,  would  seem  to  be  that  while  it  is 
generally  extortionate  in  an  indi\'idual  to  take  advantage  of  the 
exceptional  need  of  any'  other  individual  to  drive  a bargain  \vith 


CHAP.  IX 


ECONOMICS  AND  PRIVATE  MORALITY 


587 


him  on  harder  terms  than  he  could  obtain  if  competition  were 
effectively  open,  it  is  not  generally  unfair  for  a class  of  persons 
to  gain  competitively  by  the  unfavourable  economic  situation  of 
any  class  with  which  they  deal ; at  least  when  this  situation  is 
not  due  to  sudden  calamity  incapable  of  being  foreseen,  but  to 
the  gradual  action  of  general  causes,  for  the  existence  of  which 
the  persons  who  gain  are  not  specially  responsible.  If  such  causes 
diminish  seriously  the  social  value  of  the  services  of  any  class, 
some  change  in  their  industrial  position  is  undoubtedly  required 
in  the  interests  of  the  community;  but  the  corresponding  diminu- 
tion of  their  remuneration  is  a natural  method  of  bringing 
about  this  change, — a method  which,  though  painful,  is  so 
manifestly  efficacious  that  morality  hesitates  to  interfere  with 
it  by  censuring  the  persons  whose  self-interest  prompts  its 
application.  In  extreme  cases,  indeed,  as  where  labour  is  re- 
munerated at  a rate  insufficient  to  provide  the  necessaries  of 
life  without  an  exhausting  amount  of  toil,  strong  censure  is 
unhesitatingly  passed  by  the  common  moral  sentiment  of  the 
community.  It  seems,  however,  doubtful  how  far  this  cen- 
sure, as  it  is  usually  applied,  can  be  justified  on  reflection.  For 
if  persons  who  buy  or  sell  to  the  poorest  class  are  blamed  as 
immoral  for  buying  labour  or  selling  house-room  or  other  com- 
modities at  the  market-price,  there  is  a serious  danger  that  such 
censure,  while  it  will  not  prevent  these  necessary  trades  from 
being  carried  on,  will  tend  to  keep  them  in  the  hands  of.  persons 
of  low  morality,  and  thus  indirectly  aggi’avate  instead  of  miti- 
gating the  distress  which  gives  rise  to  the  censure.  At  any  rate 
if  we  condemn  “ sweaters,”  slop-shop  dealers,  and  other  small 
traders  who  “ grind  the  faces”  of  the  poor  by  taking  full  advantage 
of  competition,  it  should  be  rather  for  want  of  benevolence  than 
for  want  of  justice;  and  the  condemnation  should  be  extended 
to  other  persons  of  wealth  and  leisure  who  are  aware  of  this 
disease  of  the  social  oiganism  and  are  making  no  efforts  to 
remove  it.  That  such  efforts  ought  to  be  made  is  undeniable ; 
but  the  exact  form  that  they  will  take  if  most  wisely  directed 
must  depend  upon  the  particular  conditions  of  the  labourers  in 
question. 

§ 3.  There  is  another  question  remaining.  If,  on  the  grounds 
above  explained,  the  fair  price  of  a commodity  is  the  price  that 
an  ideal  competition  would  determine,  it  seems  to  follow  that  a 


588 


POLITICAL  ECONOMY 


BOOK  in 


monopolist  who  raises  his  prices  by  an  artificial  restriction  of  his 
commodity — not  merely  availing  himself  of  the  advantages  of 
natural  scarcity — is  to  be  disapproved  as  deliberately  sacrificing 
common  to  private  interest.  And  I think  some  degree  of  dis- 
approval is  generally  felt  for  this  procedure ; except  so  far  as 
the  total  reward  thus  obtained  by  the  monopolist  is  thought  to 
be  possibly  not  more  than  a normal  remuneration  for  the  total 
labour  and  outlay  that  he  has  been  required  to  give  in  order  to 
bring  his  commodity  to  market — as  may  easily  be  the  case  with 
monopolies  secured  by  patents  or  copyrights.  I am  not  sure, 
however,  that  the  teaching  of  “ orthodox  ” political  economy 
has  actually  tended  to  support  this  disapproval ; because  it  has 
often  produced  a blind  confidence  in  the  economic  harmony 
resulting  from  natural  liberty,  which  has  obscured  men’s  per- 
ception of  the  opposition  between  the  pecuniary  interests  of 
a monopolist — even  when  the  monopoly  is  natural — and  those 
of  the  community.  This  opposition,  I think,  has  been  more 
clearly  seen  in  cases  where  the  monopoly  results  from  combina- 
tion: the  raising  of  prices  by  “rings”  is.  held  to  be  “sharp 
“ practice  ” by  many  tradei-s  and  by  the  general  sense  of  non- 
traders. In  recent  times,  indeed,  a disposition  has  prevailed 
among  philanthropic  persons  to  exempt  from  this  disapproval 
combinations  of  workmen  to  raise  wages,  even  when  these  have 
been  seen  to  involve  some  restriction  in  the  supply  of  the 
commodity  furnished  by  the  combining  workmen;  but  there  are 
various  special  reasons  for  this  exception.  1.  So  far  as  such 
combinations  have  aimed  at  resisting  a fall  in  wages  rather  than 
obtaining  a rise,  the  result  sought — though  no  less  divergent 
from  the  normal  effect  of  competition — has  not  offended  the 
moral  sense  of  the  community ; partly  from  a general  sympathy 
wth  the  distress  caused  by  loss  of  income,  and  a sense  of  the 
advantage  of  protecting  the  incomes  of  labourers  fi-om  the 
fluctuations  that  the  changes  of  modern  industry  naturally  bring 
with  them ; partly  too,  perhaps,  because  the  old  pre-economic 
identification  of  “ customary  price  ” and  “ fair  price  ” has  not 
altogether  lost  its  influence  even  wdth  the  disciples  of  economists. 
2.  Even  when  combinations  of  employed  labourers  have  aimed 
at  raising  wages,  the  effort  has  usually  been  made  when  their 
employers  have  been  believed  to  be  making  profits  above  the 
average;  and  a vague  notion  of  implied  partnership  among 


CHAP.  IX 


ECONOMICS  AND  PRIVATE  MORALITY 


589 


producers  lends  to  this  attempt  a certain  air  of  resistance  to 
unfair  division  of  gains  among  partners.  3.  The  difficulty  of 
preventing  combinations  of  employers — especially  tacit  com- 
binations— and  the  fact  that  large  employers  have  frequently 
a partial  monopoly  from  the  very  niagnitude  of  their  business 
confer  on  the  counter  combinations  of  the  employed,  to  an 
indefinite  extent,  the  character  of  legitimate  self-defence. 
4.  Even  independently  of  combination  on  the  part  of  em- 
ployers, their  services  tend  to  be  purchased  by  society  at  high 
scarcity  values,  owing  to  circumstances  before  explained;  and 
it  seems  not  illegitimate  that  other  persons  dealing  with  them 
should  make  a systematic  attempt  to  get  some  share  of  these 
larger  gains,  if  this  can  be  done  in  the  mere  exercise  of  freedom 
of  contract h 

We  have  seen  in  an  earlier  chapter  that  there  are  various 
other  ways,  not  strictly  involving  violations  of  law  or  contract, 
in  which  individuals  or  combinations  may  promote  their 
interests  at  the  expense  of  the  community.  Thus  they  may 
raise  or  maintain  the  price  of  their  services  by  increasing  the 
need  that  others  have  of  them — as  when  solicitors  encourage 
litigation — or  by  resisting  the  introduction  of  more  economical 
methods  of  satisfying  this  need — as  when  artisans  combine 
against  machinery ; or,  again,  within  a margin  allowed  by  the 
inevitable  vagueness  of  their  contract,  they  may  reduce  the 
quantity  or  quality  of  the  services  that  they  have  engaged  to 
render^;  or  they  may  make  what  seems,  rather  than  what  is, 
useful,  and  endeavour  to  succeed  by  obtrusive  advertisement 
rather  than  superior  workmanship.  The  vague  condemnation 
passed  by  the  moral  sense  of  the  community  on  these  and 
similar  anti-social  practices  tends  to  be  sharpened  by  a keen 
apprehension  of  their  economic  consequences ; though  it  would 

^ See  Book  ii.  c.  ix.  § .3,  and  Book  in.  c.  vi.  § 6. 

2 It  is  sometimes  said  that  “every  workman  should  always  do  his  best  work  ” : 
but  the  principle  seems  ambiguous  and  misleading,  since  in  fact  one  not  un- 
common mode  of  enlarging  uneconomically  the  field  of  employment  for  certain 
kinds  of  labour  is  to  make  products  more  finished  and  elaborate  than  is  required 
for  the  purpose  for  which  they  are  to  be  used,  and  to  charge  accordingly.  The 
right  principle  seems  to  be  that  every  workman  should  do  for  the  purchaser  of 
his  labour  the  kind  and  amount  of  work  which  seems  best  adapted  to  the  pur- 
chaser’s ends,  provided  the  latter  is  willing  to  pay  the  price  which  the  requisite 
labour  would  fetch  if  otherwise  applied. 


590 


POLITICAL  ECONOMY 


BOOK  lU 


seem  to  have  been  rather  blunted  than  otherwise  by  the  influ- 
ence of  the  writings  of  the  laissei'  faire  school,  owing  to  their 
too  optimistic  reliance  on  the  ultimate  tendency  of  mere  self- 
interest  to  eliminate  the  evils  condemned.  It  may  indeed  be 
truly  said  that  such  practices  are  often,  in  the  long  run,  contrary 
to  the  interests  of  the  persons  who  have  recourse  to  them ; but 
in  other  cases,  especially  when  rendered  respectable  by  custom, 
it  seems  impossible  to  prove  that  they  are  not  really  the 
readiest  way  to  private  gain ; and  certainly  they  are  often 
judged  to  be  so  by  the  majority  of  persons  most  keenly 
concerned  in  estimating  their  utility  for  this  end. 

§ 4.  A consideration  of  facts  like  these  leads  us  naturally  to 
the  widest  and  deepest  question  that  the  subject  of  the  present 
chapter  suggests ; whether,  namely,  the  whole  individualistic 
organisation  of  industry,  whatever  its  material  advantages  may 
be,  is  not  open  to  condemnation  as  radically  demoralising. 
Not  a few  enthusiastic  persons  have  been  led  to  this  conclusion, 
partly  from  a conviction  of  the  difficulty  of  demonstrating  the 
general  harmony  of  private  and  common  interest, — even  if  we 
suppose  a perfectly  administered  system  of  individualistic  justice, 
— partly  from  an  aversion  to  the  anti-social  temper  and  attitude 
of  mind,  produced  by  the  continual  struggle  of  competition, 
even  where  it  is  admittedly  advantageous  to  production.  Such 
moral  aveision  is  certainly  an  important,  though  not  the  most 
powerful,  element  in  the  impulses  that  lead  thoughtful  persons 
to  embrace  some  form  of  socialism.  And  many  who  are  not 
socialists,  regarding  the  stimulus  and  direction  of  energy  given 
by  the  existing  individualistic  system  as  quite  indispensable  to 
human  society  as  at  present  constituted,  yet  feel  the  moral  need 
of  some  means  of  developing  in  the  members  of  a modern 
industrial  community  a fuller  consciousness  of  their  industrial 
work  as  a social  function,  only  rightly  perfonned  when  done 
with  a cordial  regard  to  the  welfare  of  the  whole  society, — or 
at  least  of  that  part  of  it  to  which  the  work  is  immediately 
useful.  From  this  point  of  view  great  interest  attaches  to  the 
development  of  what  is  called,  in  a special  sense,  “ co-operation,” 
by  which  the  conflict  of  interests — either  between  producers 
and  consumers,  or  between  different  sets  of  workers  engaged 
in  the  same  productive  industry — has  been  more  or  less  sub- 
ordinated to  the  consciousness  of  associative  effort  for  a common 


CHAP.  IX 


ECONOMICS  AND  PRIVATE  MORALITY 


591 


good.  Any  experiment  of  this  kind  that  is  economically  suc- 
cessful is  to  be  welcomed  as  a means  of  education  in  public 
spirit,  no  less  than  for  its  more  material  advantages. 

Meanwhile  it  is  always  open  to  any  individual  who  dislikes 
the  selfish  habits  of  feeling  and  action  naturally  engendered  by 
the  individualistic  organisation  of  society,  to  counteract  them 
in  his  private  sphere  by  practising  and  commending  a voluntary 
redistribution  of  wealth  for  the  benefit  of  others.  This  leads 
me  to  the  consideration  of  the  influence  exercised  by  political 
economy  on  the  moral  sentiments  and  judgments  of  instructed 
persons  in  respect  of  this  redistribution. 

§ 5.  Ever  since  Christianity  has  been  the  established  religion 
of  Europe,  thoughtful  and  conscientious  rich  persons  have  found 
a serious  difficulty  in  providing  themselves  with  perfectly  satis- 
factory arguments  in  support  of  the  customs  of  luxurious  private 
expenditure  to  which  they  have  commonly  conformed,  in  view  of 
the  obvious  happiness  that  might  be  produced  by  devoting  their 
superfluous  wealth  in  some  way  to  increase  the  scanty  incomes 
of  the  poor  ; and  it  is  a matter  of  some  interest  to  consider  how 
far  modern  political  economy  has  diminished  or  increased  this 
difficulty.  I conceive  that  it  has  operated  to  a considei-able  extent 
in  both  directions ; so  that  its  resultant  effect  is  rather  hard  to 
ascertain.  On  the  one  hand,  it  has  exploded  the  comfortable 
belief  that  the  luxurious  expenditure  of  the  rich  is  on  the  whole 
the  source  of  wages  to  the  poor ; it  has  pointed  out  that  though 
labour  is  no  doubt  employed  in  making  the  luxuries,  still  if  the 
money  spent  on  them  were  given  to  the  poor,  labour  would  be 
no  less  employed  in  making  the  additional  comforts  of  the 
latter;  they  would  get,  speaking  broadly,  the  same  wages  and 
the  gifts  as  well.  Again,  apart  from  any  particular  doctrines, 
the  general  habit  of  contemplating  society  in  its  economic 
aspect  tends  to  impress  powerfully  on  the  mind  the  great 
waste  of  the  material  means  of  happiness  that  is  involved  in 
the  customary  expenditure  even  of  the  most  respectable  rich 
persons.  On  the  other  hand,  though  political  economy  has 
hardly  had  anything  positively  new  to  teach  to  experienced 
persons  with  regard  to  the  dangers  of  almsgiving,  it  has  cer- 
tainly tended  to  make  the  common  view  of  these  dangers  more 
clear,  definite,  and  systematic.  It  has  impressed  forcibly  on 
instructed  minds  the  general  rule  that  if  a man’s  wants  are 


592 


POLITICAL  ECONOMY 


BOOK.  Ill 


supplied  by  gift  when  he  might  have  supplied  them  himself  by 
harder  work  and  greater  thrift,  his  motives  to  industiy  and 
thrift  tend  to  be  so  far  diminished  ; and  not  only  his  motives,  but 
the  motives  of  all  persons  in  like  circumstances  who  are  thereby 
led  to  expect  like  gifts  for  themselves.  If,  indeed,  almsgiving 
could  be  confined  to  the  relief  of  distress  against  which  pro- 
vision could  not  have  been  made,  this  danger  would  be  elimin- 
ated ; but  it  is  obvious  that  any  important  and  widespread  source 
of  distress,  though  perhaps  incapable  of  being  foreseen  in  any 
particular  case,  is — by  the  very  fact  of  its  frequency  and  im- 
portance— capable  of  being  foreseen  as  a general  probability,  so 
that  provision  may  be  made  against  it  by  insurance  or  other- 
wise. If,  finally,  it  be  said  that  the  poorest  class  of  labourers 
have  no  superfluous  wealth  from  which  to  make  such  provision, 
political  economy  answers  with  undeniable  force  that  they  can 
at  any  rate  defer  the  responsibility  of  increasing  the  population 
until  they  have  saved  the  minimum  required  for  security 
against  the  pecuniary  demands  of  ordinary  misfortunes.  It  is  no 
doubt  possible  for  an  almsgiver  in  particular  cases  to  convince 
himself  that  his  gift  is  not  likely  to  entail  any  materia!  en- 
couragement to  improvidence ; but  he  can  rarely  be  quite  sure 
of  this ; and  the  general  sense  that  care  and  knowledge  are 
required  even  to  minimise  the  danger  has  caused  almsgiving  tC 
be  now  regarded  as  a difficult  art,  instead  of  the  facile  and 
applauded  indulgence  of  the  pleasurable  impulses  of  benevo- 
lence that  it  once  seemed  to  be.  From  such  an  art  selfish, 
inert,  or  frivolous  persons,  if  duly  instructed,  have  a natural 
disposition  to  keep  altogether  aloof.  But  there  is  reason  to 
hope  that,  in  minds  of  nobler  stamp,  the  full  perception  of  the 
difficulties  and  risks  attending  the  voluntary  redistribution  of 
wealth  will  only  act  as  a spur  to  the  sustained  intellectual 
activity  required  for  the  successful  accomplishment  of  this 
duty. 


Printed  by  Lowk  & Brydone  (Printers)  Ltd.,  iMndon,  /. 


INDEX. 


Abstinence  of  Capitalist,  514 
Advertisements,  411 
Agency,  Law  of,  431 
Alcoholic  liquors,  taxes  on,  569 
Alms-giving,  316;  535;  582;  591,2 
Apprenticeship,  versus  technical  edu- 
cation, 465 

Arbitration,  121 /{. ; Boards  of,  355,  541 
Aristotle,  15 

Arkwright’s  inventions,  378 
Art  of  Political  Economy,  26-8,  395 
seq. ; of  Production,  398  ; of  Dis- 
tribution, 398 

Artisan  shopkeepers,  wages  and  pro- 
fits of,  327 
Austrian  School,  6 
Auxiliary  currency,  226 

Bagehot  (Walter),  on  historical  and 
deductive  economics,  47  ; Lombard 
Street,  227 ; on  bankers’  deposits, 
227 ; on  bankers’  medium  of  ex- 
change, 229  ; his  use  of  the  term 
“money,”  232  ; on  “ remunera- 
tory  ” capital,  306, 7 
Bank  of  England,  235  n. ; gold  re- 
serve of,  255,  461 

Banking,  132,  141 ; bank  notes,  225  ; 
bankers’  liabilities,  229 ; bankers’ 
obligations,  271  n. ; bank-note  cur- 
rency and  metallic  standard,  239  n. ; 
bankers’  discount  and  interest, 
371 ; drain  of  gold  from  banks,  371, 
456-9 ; bank-notes  and  govern- 
ment banks,  458 ; Bank  Charter  Act 
1844,  249,  459,  461  ; the  one-reserve 
system,  461 ; government  and 
private  action,  460-3 
Bankrupts,  429-31 

Bastable  (C.  F.),  on  Mill’s  views  of 
the  equation  of  reciprocal  demand, 
213  n. 

Bastiat  (F.),  21 ; on  unrestricted  com- 
petition, 24 ; on  Natural  Liberty, 
400 


Baxter  (Dudley),  taxes  on  alcoholic 
liquors,  569  n.  ; unskilled  and 
skilled  manual  labourers,  299  n. 
Benevolence  and  Justice,  587 
Bentham  (Jeremy),  on  wealth  and 
happiness,  518  ; on  going  to  law,  560 
Bequests,  405,  434,  539-40 
Berg-bau-freiheit,  475  n. 
BiUon-regulateur,  456  n. 

Bills  of  Exchange,  220,  226,  250-2 
Bi-metallism,  255-8,  447-^3;  com- 
bined with  a tabular  standard,  455  n. 
Bismarck,  on  Bight  to  Labour,  532 
Black  Death,  49 
Blackley  (W.  L.),  536  n. 

Borrowing,  public  and  private,  549 
seq. 

Brassey  (Lord),  Lectures  on  the  Labour 
Question,  121  n. ; on  varying  effects 
of  increased  remuneration  of  labour, 
318  w. 

Brentano,  on  insurance  in  dangerous 
occupations,  536  n. 

Bridges,  440 

Building  Land,  tax  on,  573 
BulUon,  218,  236,  257,  259,  374 
Business,  management  of,  114;  scale 
of,  115,  116-7 

Business  Connexion,  94,5;  131,2; 
298;  330 

Buyers,  more  numerous  than  sellers, 
343 ; wholesale  buyers  less  numerous, 
343 

Buyers’  monopoly,  343 

Cairnes  (J.  E.),  Leading  Principles  of 
Political  Economy,  5, 7 ; Character 
and  Logieal  Method  of  Political 
Economy,  27 ; method  of  the  science, 
29 ; political  economy  does  not  solve 
practical  problems,  30;  quantitative 
exactness  impossible,  62;  on  increase 
of  value,  65;  on  commercial  com- 
petition, 182;  on  measurement  of 
demand,  186  n.-,  on  cost  of  pro- 

38 


S.  P.  E. 


594 


INDEX 


duction,  198-201 ; on  a case  of  foreign 
trade,  212  n. ; criticises  Mill’s  use 
of  the  term  Demand,  239  n. ; on 
amount  of  currency  and  prices,  246 
n. ; interest  at  a minimum,  280 ; 
Wages-Fund  Theory,  302n. ; growth 
of  capital  tends  to  diminish  wages, 
304  n.;  on  Political  Economy  and 
Laissez  Faire,  403  n. ; 425;  on 
Wakefield’s  System,  474  n. 

Canals  and  Eailways,  440 
Capital,  126-41 ; skill  is  personal 
capital,  133 ; accumulation  of,  135  ; 
scientific  application  of  the  term, 
140 ; law  of  increase  of,  158-67 ; 
mobility  of,  216-7 ; capital  and  land, 
264 ; floating  and  non-floating,  275  ; 
fixed  and  circulating,  275  n. ; capital 
and  wages,  306-9 ; capitalists’  share 
of  the  produce  of  industry,  330  seq. ; 
telegraph  diminishes  demand  for, 
385 

Carey  (H.  C.),  on  diminishing  re- 
turns, 10,  151 

Carriage,  double  cost  of,  in  interna- 
tional trade,  216-9 
Cheques  and  Notes,  233  n. 

Chinese  cheap  labour,  161  n. 
Circulating  capital,  275  n. 

Civilization,  progress  of,  108 
Clarke  (C.  B.),  on  compulsory  pur- 
chases of  land,  483 
Clearing  House,  228 
Cliffe  Leslie  (T.  E.),  Essays,  Moral 
and  Political,  6 ; on  Adam  Smith, 
20 ; on  desire  for  wealth,  41 ; on  the 
natiouahsation  of  the  land,  511  n. 
Coal  in  England,  381  n. 

Cobden  (Eichard),  6 
Coin,  225,  235,  236 
Coinage,  debased,  240  n. ; cost  of,  241 
Colbert  (J.  B.),  17,  8 
“ Colonial  Policy,”  468,  9 
Combination  and  monopoly,  338-55 
Commodities  defined,  89 ; material  and 
immaterial,  172;  value  when  brought 
from  a distance,  212-6;  when  taxed 
sometimes  rise  in  price  more  than 
the  tax,  576  seq. 

Communism,  524  seq. 

Competition  defined,  45 ; eSect  on 
wages,  321, 2 ; competition  and 
custom,  386 ; involves  waste,  410-2 ; 
anti-social  temper  of,  590 
Comte  (Auguste),  4 
Conciliation,  Boards  of,  121  only 
partially  aided  by  economic  science, 
355 

Consumable  services,  88,  97 
Consumers’  wealth,  86-9 
Consumers’  capital,  139 


Consumption,  theory  of,  34 ; necessary 
and  superfluous,  144  n. 

Contractp,  405  seq.;  428;  enforcement 
of,  429 

Conveniences,  172 

Conveyance  and  Communication, 
governmental  intervention  relating 
thereto,  438-40 

Co-operation  in  labour,  112-21 ; moral 
value  of,  590 

Co-operative  Production,  120,  335 
Co-operative  Banks,  639 
Co-operative  Stores,  120  n.,  124,  539 
Copyrights,  92,  433 
Corn-Laws,  abolition  of  the,  1 
Cost  value,  66,  183 
Cost  of  Production,  196  seq. 

Credit,  93-4,  132,  237 
Cultivation,  margin  of,  291  seq. 
Culture,  is  it  wealth,  89,  97-8 
Currency,  225 ; inconvertible,  258, 9 ; 

governmental  control  of,  446  seq. 
Custom,  386-92 
Customary  price,  588 

Debased  coinage,  240  n. 

Debts,  91 

Decennial  credit  cycle,  249  n. 
Deductive  method,  7,  38  seq. 

Deer  Forests,  rent  of,  289-90 
Definitions,  functions  and  use  of, 
59-63 

Demand,  use  of  terms  describing 
changes  in,  185-7 ; extension  of, 
187 ; intensification  of,  187;  re- 
duction of,  187 ; fall  of,  187 
Demand  and  Supply,  Equation  of, 
188  seq. 

Differential  rates,  443  n.,  557 
Diminishing  Eetums,  law  of,  150  seq. 
Direct  and  indirect  taxes,  570 
Distribution  of  ivealth,  171  seq. ; art 
of,  398 

Distributive  Justice,  Principles  of,  498 
seq. 

Division  of  labour,  112,  3 
Domestic  Economy,  395 
Double  cost  of  carriage  in  interna- 
tional trade,  214  seq. 

Dun  (John),  229  n. 

Durable  consumers’  wealth,  137  seq. 

“ Economy,”  395 
Economic,  use  of  the  term,  14  n. 
Economic  Man,  36,  386 
Economic  Eent,  285  seq. 

Education,  governmental  intervention 
in  respect  of,  464—6,  561 
Edwards  (W.),  463  n. 

Emigration  and  Immigration,  464, 
467-9 


INDEX 


595 


Employers,  earnings  of,  330-7,  362, 
543 ; combinations  of,  589 
Equation  of  International  Demand, 
212-6 

Equation  of  Beciprocal  Demand,  212 
Exchange,  macliinery  of,  438 
Exchangeable. Value,  66 
Expenditure,  customary,  390;  of  the 
rich,  591 

Extension  of  Demand,  187 
Extensive  Labour,  100 

Pair  Price,  588 

Fair  Kents  and  Unearned  Increment, 
509 

Fair  Wages,  389,  505,  541 
Farming,  large  and  small,  480,  1 
Farr  (William),  on  the  marriage  rate, 
158  n. 

Farrer  (Lord),  on  free  trade,  486 
Fawcett  (Henry),  on  political  economy, 
3 ; on  average  rate  of  wages, 
300  n. ; on  the  wages-fund  theory, 
302  n.,  303 
Fiat-money,  258-60 
Field  of  Employment,  276,  7 
Final  Utility,  see  Utility 
Fines  by  Government,  549 
Fisheries,  410 
Fixed  Capital,  275  n. 

Floating  Capital,  275 
Foreign  Exchanges,  220  seq. 

Foreign  Trade,  108  ; 154,  5 ; 209  seq. 
Forests,  406,  7 ; 476 
France,  Paupers  in,  535 
Free  competition  and  wages,  347  n. 
Free  Trade,  1,  6,  8,  485-97 
Freedom  of  Contract,  406 
“ Friction,”  391  n. 

Game  and  Crops,  481 
German  views  of  economics,  6 
Germany,  Insurance  against  sickness 
and  accidents  in,  536  n. 

Qiffen  (Sir  E.),  304 
Godwin  (W.),  148  n. 

Gold,  appreciation  of,  65  n. ; value  of, 
how  determined,  242  seq. ; may  be 
expected  to  rise  in  value,  381 ; con- 
sumption in  arts  and  manufactures, 
453 

Gold  and  silver  mines,  legally  re- 
served to  the  Crown,  475  n. 
Goodwill,  94,5;  131,2;  298;  330; 
387 

Goschen  (Lord),  Foreign  Exchanges, 
221 

Government  in  relation  to  Industry, 
399  seq. 

Governmental  borrowing,  549-53 
Gross  produce,  145 


Habit  and  Custom,  387  seq. 

Harrison  (Frederic),  4 
Hearn  (W.  E.),  Plutology,  56  n.,  102  re., 
112  re.,  335 

Hesse  Darmstadt,  transition  of  peas- 
antry from  feudal  semi-servitude  to 
independence,  537 
Hindoo  workmen,  318  re. 

Hire,  286 

Hoarding  of  the  precious  metals,  233re., 
243,  4 

Houses,  Act  for  destroying  unhealthy, 
538  n. 

Howell  (George),  6,  117  re.,  349  n., 
350  re.,  409  re. 

Hume  (David),  Essay  on  Commerce,  108 

Ignorance,  gains  and  losses  resulting 
from,  how  far  fair,  584,  5 
Immigration  and  Emigration,  467-9 
Incidence  of  Taxation,  569  seq. 
Income,  Beal,  88 
Income  tax,  578,  9 
Inconvertible  notes,  258-60,  456 
Increase  of  Demand,  186,  7 
Increase  of  means  of  subsistence,  156n. 
Individualistic  organisation  of  In- 
dustry, 590 

Inductive  Method,  7,  37,  47 
Industrial  Partnership,  120,  335 
Industry,  Localisation  of,  373,  4 
Inheritance,  Taxes  on,  579,  80 
Insurance,  compulsory,  535,  6 
Intellectual  Labour,  Bights  in,  433,  4 
Intensification  of  Demand,  187 
Intensive  Labour,  101 
Interest  and  Profit,  differences  between, 
162  re.  ; the  competitive  determina'- 
tion  of,  261-83 

Interest,  forecast  of  changes  in  rate  of, 
384 ; paymentof,  how  far  just,  513  seq. 
International,  use  of  the  term,  222,  3 
International  Demand,  Equation  of, 
212  seq. 

International  V alues.  Theory  of,  209-23 
Inventions,  105,  123-5,  278,  364-6 
Inventors,  reward  of,  434 
Irish  Land-tenure,  478 

Jevons  (W.  S.),  Theory  of  Political 
Economy,  5,  7 ; on  Mill  and  Bicardo, 
9-11 ; on  consumption,  34  ; 44  re. ; 
on  the  mathematical  character  of  poli- 
tical economy,  52 ; 63  re. ; 68  re. ; 71 ; 
on  total  and  final  utility,  75  re., 
82  ; 101  re. ; 198;  ore  Money,  224  re. ; 
on  the  four  functions  of  money, 
232  re. ; on  the  decennial  credit  cycle, 
249  re. ; 447 ; on  a tabular  standard 
of  value,  454,5 
Joint  products,  206-7 


596 


INDEX 


Joint  Stock  Companies,  119,  141, 
334 

Justice,  Distributive,  Principles  of, 
498-516 

Justice  and  Police,  expense  of  the 
administration  of,  559, 60 

Labour,  use  of  the  term,  100 ; motives 
to,  107-12;  co-operation  in,  112-5; 
effect  of  invention  on,  123-5;  em- 
bodied or  not  embodied  in  matter, 
131 ; law  of  increase  of,  148  seq. ; 
mobility  of,  216,  7 ; remuneration 
of,  299-318;  differs  in  quality  in 
different  places,  322  n. ; right  to  the 
produce  of,  502;  right  to  labour, 
531 seq. 

Labourers,  Combination  of,  to  raise 
wages,  349-54 

Laisser  Faire,  22,  28,  399-418 
Lalor  (J.  J.),  116  n. 

Land  and  Capital,  129,30  ; 264 
Land,  price  of,  267 ; as  an  agent  of 
production,  284 ; improvement  or 
deterioration  of,  293-6 ; common  and 
individual  rights  to,  432  ; govern- 
mental interference  with,  469-84; 
unearned  increment  from,  508-11 ; 
nationalisation  of,  511  seq. ; taxes 
on,  572  seq. 

Lassalle  (P.),  157 

Lawes  (Sir  J.  B.),  153 

Laws  of  Political  Economy,  13,  338 

Leisure,  520 

Levi  (Leone),  304 

Libraries,  466 

Lighthouses,  406 

Loans,  industrial  and  non-industrial, 
270-3 

Loans  to  Government,  549  seq. 
Lombard  Street,  229-31 
Longe  (P.  D.),  4 
Losses  in  business,  363  seq. 

Lotteries,  267 

T'owe  (J.),  on  a tabular  standard  of 
•alue,  454  n. 

Luxurious  expenditure  and  taxation, 
566 

McCulloch  (J.  R.),  2,  3,  5 ; ignores  dis- 
tinction between  art  and  science, 
16  n.  ; 25 ; on  “ real  value,”  66  ; 74  ; 
331 

Macleod  (H.  D.),  4,  229  n.,  250  n., 
331  n. 

Machinery  and  Wages,  313 
Malthus  (T.  R.),  2,  22;  Essay  on 
Population,  147  seq.,  157 
Manchester,^hool,  400 
Manchesterthum,  6 
Margin  of  Cultivation,  291  seq. 


Market,  definition  of,  44;  identity  of 
price  in  a given  market,  181 
Market  Values,  182  seq. 

Mercantile  System,  16 
Metallic  Currency,  446  seq. 

Method  of  Economic  Science,  35-52 
Merivale  (H.),  on  Colonisation,  469  n., 
470,  472  n.,  473  n. 

Military  service,  546,  7 
MUl  (James),  9,  25,  129 
Mill  (J.  S.),  his  Treatise  on  Political 
Economy,  1 ; considered  the  funda- 
mental doctrines  of  the  science  final, 
1-4;  on  the  wages- fund  theory, 
4 ; criticisms  upon  his  exposition, 
4,  5 ; his  Essays  on  Unsettled  Ques- 
tions in  Political  Economy,  8,  9-11; 
on  art  and  science,  16  n.,  25,  27; 
on  economic  method,  37,  8;  on 
aversion  to  labour,  43  ; on  a mea- 
sure of  value,  69 ; on  protection  by 
and  against  the  government,  109 ; 
on  agriculture,  117  n.  ; on  capital, 
128;  on  the  law  of  the  increase  ol 
labour,  147 ; on  the  law  of  the  in- 
crease of  capital,  159,  162-4 ; on 
wages  of  management  or  super- 
intendence, 176 ; on  the  theory  of 
exchange- value  of  material  products, 
182-204 ; on  the  theory  of  interna- 
tional values,  212  seq. ; 229 ; on  the 
value  of  money,  230,1,  251;  on 
credit,  231  n.,  239  n.,  266  n.;  his  view 
that  interest  is  near  the  minimum, 
280 ; 287  n. ; on  wages,  299  seq., 
321 ; his  analysis  of  profit,  330,  1 ; 
on  the  action  of  trade-unions,  352; 
his  forecast  of  economic  changes,  380 
71.;  on  competition  and  custom, 
386;  400;  on  Wakefield’s  System, 
473  n. ; on  the  protection  of  new 
industries,  488  ; on  communism  and 
socialism,  525  n. ; on  the  “optional” 
functions  of  government,  546;  on 
those  who  benefit  from  the  law  and 
its  administration,  560 ; on  a de- 
gressive scale  of  taxation,  567  n. ; 
on  the  incidence  of  taxes,  570 
Milne  (Sir  A.),  472  n. 

Minerals  within  the  earth.  Rights  over, 
475 

Mines,  rent  of,  295,  6 
Mobility  of  labour,  110 
Money,  in  relation  to  wealth,  92 ; varies 
in  value  in  different  countries,  217, 
8 ; definition  of,  224-37 ; substitutes 
for,  237 ; value  of,  238-60 ; final 
utility  of,  260  n. ; effects  of  changes 
in  the  purchasing  power  of,  372 ; 
local  variations  in  the  purchasing 
power  of,  373  seq. 


INDEX 


597 


Monopoly,  180;  distinguished  from 
scarcity,  189;  efiects  on  value,  189, 
90;  may  result  from  combination, 
338-40 ; modes  and  degrees  of,  340- 
5;  special  characteristics  when  re- 
sulting from  combination,  345  seq. ; 
power  given  by,  347 ; divergence 
between  private  and  public  interests 
caused  by,  408;  moral  views  on, 
587,  8 

Morality  and  Political  Economy, 
581  seq. 

Nationalisation  of  the  Land,  510,  11 
National  Debt,  as  wealth,  93  n. 
“Natural,”  meaning  of  the  term,  19 
seq. 

Natural  Justice,  400 

Natural  Liberty,  System  of,  399-418 

Natural  Price,  196  seq. 

Natural  Rate  of  Wages,  316 
Natural  (or  Normal)  Values,  182  seq. 
Navigation  Laws,  422,  3 
Need,  how  far  legitimate  to  take  ad- 
vantage of,  585 
Non-Floating  Capital,  275 
Notes,  convertible  and  inconvertible, 
225,  6 ; notes  and  cheques,  233  n. ; 
regulation  by  government,  456  seq. 

One  Pound  Notes,  448,  453,  458 
One-Reserve  System,  228,  461 
Open  competition,  180 
Ouseburn  Engine  Works,  Strike  at, 
121  n. 

Out-of-work  Pay  by  Trades  Unions, 
348  n. 

Over-Production,  368  seq. 

Palgrave  (R.  H.  I,h  229,  252  n. 

Paper  Currency,  456  seq. 

Parents,  sacrifices  for  children,  325,  6 
Participation  of  workmen  in  Profits, 
118 

Partnership,  Law  of,  431 
Patents,  included  in  Wealth,  92 ; ana- 
logous to  rent,  298  ; whole  gain  not 
kept  by  patentee,  365 ; suitable  length 
of  protection  by,  433 
“ Paternal  ” Legislation,  424 
Patten  (Simon  W.),  152,  383  n. 
Patterson  (R.  H.),  458 
Paupers  in  France,  535 
Pawnbrokers,  427 ; governmental  mono- 
poly of  pawnbroking,  463,  538 
Peasant  Cultivators,  538 
Peasant  Proprietorship,  117  n. 

Penny  Post,  557 
Personal  Capital,  133 
Physiocrats,  16-9,  63,  399 
Philanthropy,  416 


Piece- Wages  (Stiicklohn),  116 
Pins,  MaUng  of,  113 
Plutology,  Comparative,  39 
Poisons,  Sale  of,  423 
Police  and  administration  of  Justice, 
cost  of,  559,  60 

Political  Economy,  defined,  12;  scope 
of,  12-34;  how  related  to  the  Art  of 
Government,  26-8;  to  the  general 
science  of  society,  29-32;  Science 
and  Art  of,  32-4;  Method  of,  35-52; 
how  far  a mathematical  science, 
52 ; Art  of,  395-8 ; influence  on 
popular  ethical  conceptions,  503;  in 
relation  to  private  morality,  581  seq. 
Poor  Law  (English),  49,  110,  526, 
533  seq. 

Poor  Relief  and  Wages,  316,  7 
Population,  increase  of,  147-58,  398, 
526,  531 

Post  Office,  444,  5 
Potential  price,  132 
Price,  meaning  of  the  term,  179,  185; 
natural  and  market,  204,  5 ; in  in- 
ternational trade,  217,  8;  extortion- 
ate, 389;  “customary”  and  “fair,” 
588 

Price  (Bonamy),  51,  229  n. 
Primogeniture,  Law  of,  435 
PrivateMorality  and  Political  Economy , 
581-92 

Private  Property  in  Land,  501  seq. 
Produce  of  labour,  89  ; 98,  9 ; 173 
Producers’  Wealth,  86-9,  172 
Producers’  Capital,  139 
Production  of  Wealth,  24-6;  method 
of  enquiry,  37;  how  influenced  by 
Distribution  and  Exchange,  55,  6; 
causes  of  variation  in,  96-125 ; 
fundamental  questions,  99 ; laws  of, 
142-67 ; cost  of,  196  seq. ; Art  of,  398 
Products  jointly  produced,  value  of, 
205-7 

Professional  fees,  389 
Profit,  use  of  the  term  in  a wide  sense, 
126;  distinguished  from  Interest, 
162  n. ; the  share  of  the  employer, 
175;  criticism  of  Cairnes’s  view,  200 
seq. ; normal  profit,  205  n. ; rate  of 
profit,  how  determined,  330  seq. 
Profit-Sharing,  118-22 
Property,  Right  of,  420,  432-6 
Protection  of  Native  Industry,  on 
military  grounds,  422,  3;  adopted 
by  most  civilized  nations,  485,  6; 
broad  rule  of  “ taxation  for  revenue 
only,”  487  ; temporary  protection  in 
certain  circumstances  defensible, 
488  seq, ; from  the  cosmopolitan 
point  of  view,  488-91;  from  the 
national  point  of  view,  492-5 


598 


INDEX 


Prudential  restraint  on  Population, 
155,  158  n. 

Prussia,  right  of  digging  for  minerals, 
475  n. ; aid  to  peasantry  to  pass 
from  feudal  semi-servitude  to  pro- 
prietorship, 537 
Public  Pinance,  544-80 

“ Quasi-Cost  of  Production  ” of  Labour, 
315 

Quasi-governmental  action,  440 
Quesnay  (F,),  on  Agriculture,  17,  8 

Kailways,  may  yield  a surplus  analo- 
gous to  rent,  297 ; as  affecting  public 
and  private  interests,  408;  govern- 
mental management  or  control, 
440-4 

Eailway  rates,  556-8 
Ban-Wagner,  407  n. 

Kaw  Materials  of  Production,  284 
Eeal  income,  173 
Heal  price,  218 
Eeal  value,  66 

Reciprocal  Demand,  Equation  of, 
212 

Religious  Worship  and  Instruction, 
466 

Rent,  Ricardo’s  view  01,284.563.;  three 
theories  combined  therein,  285; 
“ economic  ” rent,  285  ; popular  use 
of  the  term,  285;  rent  and  “hire,” 
286 ; regarded  as  price  paid  for  use 
of  the  “original  and  indestructible 
powers  of  the  soil,”  286;  competitive 
determination  of,  289  seq. ; of  deer 
forests,  289,  90  ; “ margin  of  culti- 
vation,” 291 ; difficulties  in  framing 
rent-contracts,  293-6 ; rent  of  mines 
includes  rent  and  royalty,  296,  7 ; 
Ricardo’s  conception  applicable  to 
building  land  in  towns,  297  ; rent 
of  land  used  for  railways,  297 ; cases 
analogous  to  rent,  297,  8 
“ Rente  ” (French  term),  285  n. 
“Resumption  ” controversy,  226 
Retail  trade,  411 

Ricardo  (D.),  1;  attacks  upon  his 
method,  6;  J.  S.  Mill’s  relation  to 
Ricardo,  9-11;  Ricardo’s  use  of 
the  term  “natural,”  21;  on  value, 
66,  74;  on  measurement  of  wealth, 
81 ; his  definition  of  capital,  129 ; 
on  law  of  diminishing  returns,  152 ; 
his  doctrine  of  a “ natural  rate  of 
wages,”  157,  316;  on  differences  in 
wages,  200  n. ; his  theory  of  value, 
202  seq. ; his  doctrine  of  rent,  285 
seq.,  383 ; identification  of  capitalists 
and  employers,  331 ; attitude  to- 
wards “natural  liberty,”  400 


Rich  persons,  expenditure  of,  404, 
591 

“ Right  to  Labour,”  531  seq. 

Right  of  Property,  420 
“Rings,”  the  raising  of  prices  by, 
588 

Roads,  governmental  intervention  with 
regard  to,  439,  40 
Eoscher  (W.),  102  n. 

Saving,  circumstances  affecting,  160 
seq.  ; effect  of  taxes  on  amount  of, 
567 

Say  (J.  B.),  33,  4 
Scarcity  Value,  190-2 
Scrope  (G.  Poulett),  on  a tabular 
standard  of  value,  454  n. 
Second-hand  supply,  188  ; 207,  8 
Securities,  markets  for,  how  affected  by 
speculation,  195  n. ; effect  of  rate  of 
discount  on  price  of,  254 ; circum- 
stances affecting  price  of,  266-8 
Self-interest,  effects  of,  401 
Senior  (N.  W.),  2 ; 16  n.  ; 26  ; 29  ; 30; 
qualification  of  extreme  deductive 
view,  43  ; 88  n. ; his  view  of  interest, 
261;  514 

Sliding  scales,  121  n.,  542 
Slop-shop  dealers,  587 
Smith  (Adam),  6;  his  treatment  of 
political  economy,  16  seq.;  on  differ- 
ences in  wages  in  different  employ- 
ments, 42,  3 ; 47 ; on  the  measure  of 
value,  67  n. ; 87  ; 96  ; on  division  of 
labour,  113 ; on  capital,  137  ; 147 ; 
189  71.;  199  ; on  inequalities  of  wages, 
320  seq.,  335,  362 ; his  view  of  the 
end  aimed  at  by  political  ecomony 
regarded  as  an  art,  396 ; on  Laisser 
Faire,  399  seq. ; 421.;  his  commenda- 
tion of  the  English  Navigation  Laws, 
422,  3;  on  the  “Colonial  PoUey,” 
468,  9;  on  wealth  and  happiness, 
518  ; 544  ; 560  ; his  second  canon  of 
taxation,  563 
“ Smithianismus,”  6 
Social  Capital,  law  of  increase  of, 
165-7 

Socialism,  67,  513-6,  524  seq.,  590 
Society,  individualistic  organisation  of, 
498  seq. ; science  of,  in  relation  to 
political  economy,  29  seq. 

Soetbeer  (A.),  on  consumption  and 
supply  of  gold,  453 
Speculation,  effects  of,  194-6 
Spontaneous  gifts  of  nature,  173 
Standard  of  Comfort,  316,  537 
State,  see  Government 
Stephen  (Sir  James),  3 n. 

Steuart  (Sir  James),  Inquiry  into 
Principles  of  Political  Economy,  15 


INDEX 


599 


Subsistence,  increase  of  means  of, 
156  n. 

“ Sweaters,”  587 

Tabular  Standard  of  Value,  453  scq. 
Taxation,  not  the  sole  mode  of  pro- 
viding for  the  pecuniary  needs  of 
government,  545  seq. 

Taxes,  one  of  the  sources  of  public 
revenue,  549 ; how  to  be  distinguished 
from  earnings  of  government,  558 
seq. ; not  always  proportional  to 
services  rendered,  559  seq. ; con- 
siderations that  should  have  weight 
in  the  selection  of  taxes,  562  seq. ; 
degressive  and  progressive  scale  of 
taxation,  567  m. ; incidence  of  taxes 
hard  to  determine,  569  seq. ; taxes 
on  special  classes  of  persons,  571 ; 
on  wages,  571;  on  particular  kinds 
of  durable  wealth,  572;  on  land, 
572—4 ; on  production,  574  seq. ; on 
inheritance,  579,  80 
Technical  Education  versus  Ap- 
prenticeship, 465 

Thornton  (W.  T.),  on  Labour,  4,  80, 
187  n. , 409  n. 

Token  coins,  240,  446  n. 

Tells,  440 

Tooke  (Thomas),  History  of  Prices,  70 
Torrens  (Colonel),  3 
Towns,  growth  of,  383,  4 
Trade  Developments,  formerly  pro- 
tected by  legal  monopolies,  367  n. 
TradesUnions,  111;  338;  their  methods, 
348,  9 ; conditions  for  their  success, 
349-54 ; their  influence  on  mobility 
of  labour,  376  ; 409  n.  ; 588,  9 
“ Truck,”  427 

Trustworthiness  in  workmen,  321  n. 
Turnpike  Trusts,  440  n. 

Under-Production,  369 
“ Unearned  Increment  ” in  the  value 
of  Land,  508,  9 
Use,  Value  in,  63,  74 
Useful  and  Utility,  meaning  of  the 
terms,  63  n. 

Utility,  Final,  75  n.,  82,  3,  186 


Vagrants,  534  n. 

Value,  as  treated  by  Kicardo  and 
J.  S.  Mill,  10;  in  use  and  in  ex- 
change, 63;  definition  and  measure 
of,  63  seq. ; subjective  and  objective, 
74  seq.  ; “ real  ” value,  74-7 ; de- 
ductive theory  of,  179  seq. ; value 
and  price,  185 ; monopoly  value,  189, 
90  ; scarcity  value,  190-2 ; market 
value,  192-6 ; cost  of  production 
and  value,  196  seq. ; international 
values,  209-23 ; value  of  money, 
238scg. ; tabular  standard  of,  4536-65. 

Vis  inertiae,  economic,  373 ; of  custom, 
391  n. 

Wages,  reckoned  by  time,  115;  piece 
wages,  115,  6 ; Eicardo’s  doctrine  of 
wages,  157 ; the  “iron  law”  of,  157; 
use  of  the  term,  175;  wages  of 
management  or  superintendence, 
176,  201,  262,  330  865.,  512;  com- 
petitive determination  of,  299  seq. ; 
not  paid  out  of  capital,  306-9 ; ef- 
fects of  machinery  on,  313 ; differ- 
ences of  wages  in  different  occupa- 
tions, 319  seq. ; net  advantages  of 
an  occupation,  323,  4 ; influence  of 
trades-unions  on  wages,  348  seq. ; 
“ fair  ” wages,  502  seq. 

Wages-Fund  Theory,  4,  302  seq.,  352 

Wakefield  (Gibbon)  and  the  Wake- 
fieldian  System  of  Emigration,  472- 
4 

Walker  (F.  A.),  106,  177, 8,  233  n., 
331,  334 

Walras  (Leon),  on  a combination  of 
bi-metallism  with  a tabular  standard, 
455  n. 

Watt’s  inventions,  378 

Wealth,  the  subject-matter  of  political 
economy,  12 ; desire  for,  41-3,  107 
scq.  ; measurement  of,  78-95 ; pro- 
ducers’ and  consumers’  wealth,  86 
seq.;  culture,  skill,  debts,  copyrights, 
etc. , how  far  to  be  included  in  wealth, 
89-95 ; relation  of  wealth  to  happi- 
ness, 518  scq. 

Whately  (K.),  531  «. 


U09^09830a 


433  R9  T,3'i3  i 

06/27/03  33357  W 


Date  Due 

Form  335— 40M— 6-40 


